What Are The 7 Stages of the Financial Planning Process?

What are the seven steps of financial planning? When it comes to financial planning, there is a goal you want to achieve and a plan you follow to achieve it. Along the way, you will determine which investments make sense, how long it should take you to achieve your plan and how much money you need to allocate on a regular basis.

Start with the basics

There’s lots of questions that come into it, but very high level, a financial plan is just that. It is a plan for your finances to achieve certain goals that you have for yourself. Those goals could be anything from a house, to a baby, to a car, to retirement. The legacy that you want to leave your kids, to starting a business. Anything that you would allocate money towards, it would be good for you to have a financial plan to know exactly when, where, and how to move that money.

1. Understand your needs

That leads us into the first step. The first step is to understand your client’s goals. That is for us as fiduciary advisors. Where we want to understand you and your needs. If you’re making the plan yourself, then you want to understand yourself and your needs. This is going to be done with open ended questions, closed into questions, just a variety of questions.

Some will be quantitative where we’re talking about the numbers and the nuts and the bolts. Some of them will be qualitative where we’re talking about the emotions and the goals and the dreams. You really have to have an understanding of both to put a good financial plan together. On the open ended, I may ask you, what does retirement look like for you?

On the qualitative, I may say, how do you feel about retiring in your thirties? If I wanted to ask close ended questions, I may say, how much do you want to spend in retirement each month? There are lots of different questions that will help me to be able to understand you and your needs. That way, when I’m making recommendations, they make sense to you.

Problem within the industry

The biggest problem I see is that there are lots of people trying to manufacture problems for their solutions. Where they have one or two solutions and they have to be able to find people that fit in that box. The way I would describe it is, is if you’ve ever seen a baby where they have those blocks and they have like triangles and blocks and circles. Then they’re given certain little shapes and they have to like pluck the shapes in each of them. And it has to go on the correct one. Then sometimes the baby will be trying to jam a triangle into the circle, but it doesn’t really work or they’ll be trying to put the circle in the square and it doesn’t quite fit.

Sometimes if they bang it hard enough, it, it goes through every so often. That’s how I feel about financial planners that are just focusing on getting rid of their solutions, even though they don’t know if the person has that problem. And so I think it’s very important that you start with understanding what it is that your success looks like. How retirement looks, what your goals are, your emotions, as far as investing. Then when you create the plan, it is designed exactly to your liking.

2. Identifying and selecting goals

Once you have an understanding of yourself, we can start putting them in order of importance. So we’ll say , these are the five things that I really think are very important to accomplish. Then you may say that these other five would be icing on the cake. We prioritize your goals. Then as an advisor, I’ll help you select which goals make the most sense based on the overall picture you created.

The other aspect of that is we have a list of goals, but all of them can’t be accomplished at the same time. Some goals can be accomplished in a year, while others may take 5, 10, 15 or even 20 years.

You may say, I really want to travel. Well, how much are you going to be able to allocate towards work? How much are you going to be able to take off from work? How much money can we put aside each month to be able to go towards this goal? Then we’re able to say, based on that information, this should be a five year goal where we work together to make sure it makes sense for you.

3. Evaluate what your doing and make adjustments

Then you’re really able to move nicely into step three, which is analyzing your current course of action. What have we done so far to accomplish this goal? Have you been dabbling in investments in the market or investments within businesses or in real estate?

What have you been doing? How much of your income have you been allocating towards your goal? Is it fifty dollars a month? Hundred dollars a month? Possibly a thousand dollars a month? How much money have you been putting towards this? I often like to see what that looks like as a percentage of your income, because I think it really gives a better picture. Sometimes the dollar amount may feel low or may feel high.

How much is enough?

When you know it as a percentage of your income, it levels everything out. I’m allocating 5% of my income towards this goal that I have for myself. How does that make me feel? I’m allocating 25% of my income towards this goal I have for myself. How does that make me feel?

Each of us have a different timeline. It doesn’t mean that any one of the numbers are good or not so good. When you look at it from a percentage, it helps you to understand how much you’re allocating. How much you’re putting towards these life goals you have set for yourself.

Keep it revenue neutral

If you’re already doing something, then sometimes we can find what’s called revenue neutral. Let’s say you have a hundred dollars going towards one account and a hundred dollars going towards another account.

What if we’re able to reduce those two accounts by $50 and then you put that hundred dollars towards your new investment? This is what is means for something to be revenue neutral. You’re still spending the same, $200 a month, but it’s being allocated differently. Now that doesn’t always happen. Many of the times we have to put more towards it.

4. Create the financial plan

For step four, you’re pretty much done if you’re working with a fiduciary financial planner. You would just relax and enjoy yourself, and then we would start working on the financial plan. If you’re doing it yourself well, this is where you start putting all your numbers together to then create your own financial plan.

The financial plan is putting everything we’ve discussed together in a way that’s going to help you achieve the goals that we identified in step two. Using the assets that we identified in step one, and then adjusting or adding to the course of actions you have already taken in step three. When you put all of that together, you should be able to create a financial plan that makes a lot of sense to you.

5. Present the financial plan

That leads very nicely into step five, which is we present the findings. If we work on the financial plan, everything that we’ve discussed, it is your plan, even though we put it together.

So we present it to you. Now, based on that feedback, we can either enact that plan or we can make tweaks to it. If for some reason you’re like, you know what I’ve been thinking about it. Even though I said at the first meeting, that it was really important for me to retire in five years. I actually just got this promotion, or I just got this new job and my circumstances have changed.

6. Implement the financial plan

Step six is implementing the plan. The plan is only as good as the action you take. We want to make sure we’re taking the action we agreed upon.

We’ve already gone over the likelihood of success based on historical averages of the investments. We leave ourselves a little bit of wiggle room because things happen, right? That’s the truth, things happen. But as long as we have baked that into our cake, where we’re understanding that everything may not be rainbows and Skittles all the time.

7. Monitor your progress (adjust as needed)

That leads us to our final step, which is step seven, which is just you monitor your progress. Along the way, things are going to change. Your goals may change. You may want a bigger house. Your family may change. You may have a larger family. Your income should change as you’re gaining experience and getting promotions and things like that, where you have more money.

You may want to maintain a larger lifestyle than you previously put in the plan. Also things change with the market where we are investing in certain industries and those industries don’t look as well anymore. Certain companies, things have changed where all of this needs to be re-looked at at least on an annual basis.

There’s many people that we look semi-annually quarterly. I probably wouldn’t do much more than quarterly, but there are some people that maybe want to look at it monthly. But you do get monthly statements on your investment. So that is one thing. But as far as meeting with your actual advisor, you probably don’t need to meet monthly.

But if you wanted to meet quarterly just to, to kind of talk it out. Well, that’s always fine, but it’s really up to you. You can meet anywhere from, four times a year to one time a year. There are some people that maybe meet like two or three times, every five years, but that’s less common because our lives are changing so much. But you do have that flexibility in that option.

If you’re creating your own financial plan, then you should just want to look at. I would say maybe every new year’s right. Every new year’s you look at it and say, this is how the past 12 months went. This is how the next 12 months should go. How am I doing? As far as my projection? Am I still on track to be able to accomplish the goals that I set for myself?

Final thoughts

The seven steps of financial planning are designed to help you understand your overall needs. Once you identify your needs, you are better prepared to set your goals. After you finishing setting your goals, start the process of accomplishing them. This is no different than preparing to take a trip and using your GPS for guidance. You can only chart the path and gauge the necessary travel time if you know where you are and where you want to be. Last, monitor your progress so you can make adjustments to your plan as you see fit. Just like traveling and realizing there is an accident in the road… you want to look for alternate routes.

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