Financial planning is a process; it is not a one-time event. Here are the six discrete steps involved in the process of creating the financial future you crave.
This is a great framework to use for your overall planning, and can also be applied to each separate financial issue and decision with which you are faced. Think of it as a way of thinking and a method for approaching any important problem.
Remember that research has proven that the most important factor in achieving success is having specific goals and a written plan to reach those goals.
The Six-Step Financial Planning Process*
Step 1 is to determine your starting point. Where are you today?
Add up your assets (things you own) and your liabilities (amounts that you owe) and calculate the difference. This is called your net worth. You can set goals specific to growing assets, decreasing liabilities or tied to measuring your increase in net worth.
Cash flow – compare your current expenditures to your income. This helps you determine your saving capacity and the resources you have available to reach your bigger goals. You might want to set specific targets to decrease spending and live within your means. (That’s actually a very good idea.)
Risk management and estate planning are both important areas. What is your current insurance coverage on your property, and against liability claims?
Take a snapshot of other key items, like:
- how much tax you actually pay
- what would happen if you died (Who would get your stuff? Would there be taxes to pay in your estate? Would your family have enough income?)
- what would happen if you became disabled.
Assess your life insurance needs and coverage, and income sources and needs in the event of disability. (Disability is several times more likely to occur than death, during your working career.)
Step 2 is setting specific, measurable goals. This is a statement of where you want to go, and where you want your life to go. Start by sitting quietly and visualizing yourself six months, one year and three years from now. What does your ideal future look like? How good do you feel in this picture, after having achieved those goals?
Get specific. If your goal is “increase my net worth 10% by December 31, 2011,” then measure it so you can put a specific dollar number on that goal and develop an actionable plan to reach it.
Step 3 is determining the gap between where you are and where you want to go. This will likely present both challenges and opportunities.
If your goal is to pay off certain debts by year end, then writing down all your specific obligations, their interest rates and payment amounts will show you opportunities to reduce the interest rate on some, and advantages to focusing on certain debts first. By fixating on your goal, a plan will begin to develop.
Don’t hesitate to ask for help – I do.
Step 4 is examining the alternate routes to your destination. Again, help may be valuable. There is usually a variety of alternatives in financial planning and it’s important that you examine several before you make your decision.
Step 5 is putting the ideas into action – executing your plan. Without action, there are only noble thoughts. Get going.
Motivation will come from the excitement of the plan itself and the vision of success that it shows you. Reminding yourself throughout the year of your goals and your reasons for wanting to achieve them should be enough to keep you going through the tough times, which will crop up and try to deter you.
Step 6 is to periodically review your progress and update your plan as needed. This is an important and ongoing activity to ensure that planning is a process rather than a one-time event. As your situation changes, your plan will need to be updated and modified. For best success, this complete review and update should take place at least once a year, with quarterly measurements of progress along the way. If you are inclined to do it monthly, that’s even better.
Financial planning may not be an exciting sport, but achieving financial success is the foundation for freedom in the rest of your life. Tackle it now!
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* The Six-Step Process was originally developed by the Canadian Association of Financial Planners, and is now followed by successor advisors’ and planners’ professional organizations like the IAFP, Advocis and the CIFPs.
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This information is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.