By Jessica Lanning, JD, CFP®
Finally committed to getting your financial ducks in a row? Not sure how to get started? Or why you should?
Let’s break down the financial planning process and explain why it’s so important.
What is financial planning?
What most people want to achieve is financial well-being — that is, knowing that they have enough money to meet their living needs and they’ve prepared for any financial crisis. They want to know that they and their loved ones are “going to be okay” financially.
Part of financial well-being is financial planning. Financial planning is the process of organizing and managing your finances to achieve specific outcomes.
- Setting short-term and long-term goals
- Creating a net worth statement
- Creating a spending and cash flow plan
- Creating an emergency fund
- Managing taxes
- Managing debt
- Planning for retirement
- Procuring adequate insurance
- Planning for incapacity and death
With a plan in place, most people are better able to understand their current financial situation and make informed decisions about how to reach their goals and make mid-flight corrections when life throws curveballs.
A remarkably high percentage of those who create a plan and follow it almost always achieve their goals.
The basic steps of planning
The comprehensive financial planning process includes six steps:
- Understanding your personal and financial circumstances.
This includes looking at your income, expenses, assets, liabilities, and net worth. It also includes factors such as your employee benefits, tax liabilities, insurance coverage, your health, family longevity, and any challenges you may anticipate as you go through life. Once you have an understanding of where you are, you can move on to the next steps.
- Identifying and selecting goals.
This is a visioning exercise. What do you want to do with your life and your time? What do you want for your children? Do you want to own a home? A second home? How do you want to build wealth?
- Analyzing your current course of action and potential alternative courses of action.
This is an evaluation of what you’re doing now. Is it manageable? Is it working? Will it help you achieve your goals? How else might you approach your goals and your situation? What else is worth considering?
- Developing recommendations.
If you are working with a financial planner, this is the step where that person would work on your behalf to develop scenarios to show you how you might achieve your goals. If you are working on your own, this is where you would do more research to determine how you might improve your plan.
- Presenting the recommendations.
If you are working with a planner, this is where you would consider your options and select the ones that would work for you and which you feel you can make a commitment to implementing. If you are working on your own, this is where you are looking at your biases and making sure that you are making conscious decisions about which choices make the most sense.
- Implementing the recommendations.
At this stage, you are making those changes to your plan and your behavior to make the plan work. This is often a work-intensive phase where there is a lot of energy being burned to get you into a new orbit where you can get back on auto-pilot with your activities.
- Monitoring progress and updating.
Airplanes are off-course 90 percent of the time, yet they manage to make it to their destinations at the intended time. Why? Because they are always making mid-flight corrections. Your financial plan needs the same attention. Annual reviews are typically enough, but if a major life event happens, then perhaps more often.
Why is planning so successful?
Financial planning works because it’s a systematic approach to managing your finances. It provides you with clarity and direction as you work towards achieving your financial goals.
Plus, since it involves setting measurable goals, monitoring progress, and making adjustments as needed, it helps ensure that you stay on track and don’t get off course too often.
Do you need a financial planner?
No. But it can make a big difference. Having a professional planner is like having a trainer at the gym. You have all the information you need to get into shape but a trainer will help you be more efficient, get you there faster, and prevent injuries.
Financial planners serve a similar role. They are trained to help you evaluate your current situation, identify and prioritize your goals, and develop a plan to reach them.
They can also provide advice about investing, taxes, insurance, and more. Having someone who understands the complexities of the financial landscape can be invaluable when it comes to making sound financial decisions, saving you time and anguish, and helping you stay on track and make changes when life happens.
When should you hire a planner?
A planner can be a great asset at any age. Most people will employ a planner when their lives start to get complex or they have a life event happen (birth of a child, an inheritance, etc.).
What most young-ish people overlook is that their greatest asset in a financial plan is time. The sooner you can make a plan and follow it and develop a relationship with someone who will help you get there, the better the chances of your success.
If you want to learn more about how a financial planner can help you, please reach out.
Lanning Financial Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.