What are the Steps Involved in the Financial Planning Process?
You might be surprised to learn that the average American owes approximately $90,000 in debt. This includes personal loans, credit cards, and mortgages. While taking on debt can allow you to leverage purchases you couldn't otherwise afford, it will often hold you back from reaching your financial goals.
Understanding how to plan for your financial security is crucial, but it's not as difficult as it might seem. So, what are the steps involved in the financial planning process? Let's explore the key details you need to know.
The Importance of Financial Management
Properly managing your finances allows you to stay financially stable during periods of economic uncertainty. For instance, knowing you have access to abundant financial resources after being laid off from your job can preserve your mental health. Proper financial management can also help you pursue personal and professional projects.
Starting a business, renovating your home, etc., are common ways people leverage their wealth. Most important, though, is the ability to remain financially taken care of during retirement. There's something to be said about establishing generational wealth, as well.
What Are the Steps Involved in the Financial Planning Process
It's crucial to understand the steps you need to take toward reliable financial planning. This will help ensure you handle this obligation appropriately. Let's look at them in detail below.
Understand Your Financial Situation
As you might assume, it's essential to have a strong understanding of your financial situation before moving forward. One of the most important attributes is your household budgeting. This includes your monthly income, expenses, and how much you plan to save or invest.
Your financial management plan will differ depending on whether you're married or single, as these impact your tax obligations. The same can be said about those who live or work abroad. Consider your current savings and investments so you have a solid grasp of what goals you need to reach.
Keep in mind that certain financial obligations will have a large impact on the way you handle your finances. These include property purchases, weddings, and emergency funds.
Establish Your Goals
Once you have a strong understanding of your finances, you can begin establishing your goals. Keep in mind that you should consider future lifestyle changes while planning your finances. If you want to have children, for example, it's essential to assess how this will impact your financial obligations.
Identify Alternatives
There's a chance the strategies you initially considered won't be available. You might also discover they aren't as effective as you expected them to be.
It's best to have a handful of alternatives in place so you can avoid interruptions or falling short of your ambitions. You don't have to stress about finding a large number of alternatives, either. A handful will likely be suitable.
Pinpoint Major Challenges
There will undoubtedly be a set of challenges you'll need to overcome when moving forward. These could be related to debt, cash flow, maximizing your gains, etc.
Retirement planning is also a goal that tends to have many obstacles in the way. Once you determine the challenges you'll face, you can look for opportunities to overcome them.
It's best to educate yourself as much as possible on the problems you plan to tackle. For instance, you might be concerned with how changing industry trends will impact certain investments you have.
Gather Documentation
It's best to organize your financial documents early on in the process. Having access to the right information plays a large role in how effective your financial planning strategy is.
This often includes looking through tax records, financial forms, and folders on your computer. Key details to consider are:
Insurance policies
Tax returns
Cash flow
Relevant legal documents
Wills
The less you have to search for relevant documents, the better control you'll have over your finances. Keep this in mind when moving forward.
Create a Plan
This is the most important part of the financial planning process. Crafting an effective plan will dictate whether you're able to reach your goals.
As long as you've properly established your needs, you've already laid the groundwork for a successful plan. When in doubt, it's best to research more before taking action.
Jumping in under-informed can lead to disastrous results. It sometimes takes weeks or even months to create a solid plan, so don't rush the process.
Work with a Professional
It's imperative to work with the right professional to get the results you need. They have the tools and resources to help you avoid common pitfalls.
However, not all are created equal. You'll need to research their past reputation before making your decision.
See what other people have to say about their timeliness, communicativeness, and professionalism. You should also keep an eye out for fake reviews.
These are often posted in batches and contain many identical keywords. They can be negative or positive, and you should ignore them when deciding which option is best for you.
Look at the pricing structure before moving forward. Having insight into what you'll pay can prevent financial surprises.
You can also determine if the money you spend provides enough value. You don't have to budget for the most expensive options, either. There's a point of diminishing returns regarding what you pay.
Instead, look for someone in the middle of the industry's price range. They should be easy to get in touch with, as well.
If issues arise and you get left in the dark, it could be impossible to find the right solution. Are they enthusiastic about helping you?
Don't hire someone who isn't passionate about bringing your vision to life. You can assess this attribute by paying attention to how many questions they ask about your needs.
If they seem indifferent, don't be afraid to look elsewhere. As long as you do your due diligence during the search, you shouldn't encounter issues.
Monitor Your Results
After you put your financial planning strategy in motion, you can't simply walk away from it. You'll need to monitor your results so you can make the necessary changes.
For example, you might find that your investments failed to reach your initial goals. In contrast, you could also discover that you performed much better than anticipated.
Scenarios like these could leave you wondering how to maintain this performance or what to do with the extra money you've made. The good news is the professional you hire will handle this obligation for you. Even if you make investments without a professional's guidance, you should still hire someone to review them for you.
Common Mistakes to Avoid
There's no shortage of mistakes people make when planning their financial future. Navigating these will help keep your financial plans bulletproof. Listed below are some of the most notable.
Neglecting an Emergency Fund
Some people make the mistake of investing so much of their money that they neglect their emergency fund. The truth is disaster can strike at any time, and most people are only a few paychecks away from financial distress.
For instance, imagine losing your job with no savings while having monthly expenses of $5,000. Within three months, you'll need to have come up with at least $15,000, which is something most people are incapable of with such short notice. Make sure you have at least three to six months' worth of living expenses saved up before you start contributing major cash to your investments.
Setting Unrealistic Expectations
You shouldn't lay out unrealistic expectations for your investments. This will only lead to disappointment, and you might become frustrated that you haven't reached your goals.
Those who don't understand the process could blame their financial advisor even when it wasn't their fault. Instead, ensure you stay cognizant of what's likely to occur. Your advisor can help you understand how things will play out so you can stay grounded.
Not Updating Wills or Beneficiaries
Certain life events can elicit the need to update your will or list of beneficiaries. These include marriage, divorce, and having children.
Your investments will eventually be allocated to your beneficiaries if doing so is part of your estate plan. There's something to be said about the peace of mind you'll get from updating them, as well.
Attempting Too Much on Your Own
It's best to stay within your capabilities when financial planning. You likely have useful skills and knowledge you can use to achieve the results you're after.
However, you also likely have shortcomings that could impact the outcome of your investments. Always outsource your weaknesses so you can avoid falling behind.
Take Action ASAP
As soon as you determine the need for financial planning, it's imperative to take action as soon as possible. Understanding the answer to "What are the steps involved in the financial planning process" will help you avoid issues you may have otherwise encountered. Just be sure to work with the right professional.
Phillip James Financial specializes in helping people close to retirement secure their financial future. We strive to adapt to each client's unique needs and help them bring their visions to life. You'll learn more about what we can do when you get in touch with us today.