An Introduction to Financial Planning

What is Financial Planning?

Let’s begin by making an important distinction. The word, “plan”, is both a noun and a verb. We see easily that the verb, or the action of planning, comes before the noun, or the “plan”. Put differently, the plan is the output of the planning process. Therefore, financial planning is an action or series of actions taken with the intention of producing a comprehensive financial plan. Contained within the plan are more actions to be taken, but these actions are not “financial planning”, per se, but rather actions related to your financial life, such as saving and investing.

Once we have a financial plan, we can then begin to take action on the strategies and tactics outlined in the plan that move us toward achieving our desired goals in life. Therefore, the financial plan becomes a dynamic, holistic roadmap, customized to the individual (couple, or family), from which more action is taken, as necessary, to move us forward through the important events in our lives.

The Dynamic Process of Financial Planning:

• Financial Planning –> Comprehensive Financial Plan
• Comprehensive Financial Plan –> Steps toward saving, investing, borrowing, etc.
• Life Happens – work, buy a home, marriage, children, education, retirement, death, and so on.
• Periodically review, revise and repeat

In this article we discuss the financial planning process. Elsewhere, we discuss the contents of a professionally created comprehensive financial plan.

Synonyms and Subsets of Financial Planning

Financial planning can go by other names, or it can contain within it, other planning processes that can exist as standalone processes in some cases. A comprehensive financial plan created by a qualified professional will address, when appropriate, any or all of the following:

• Retirement Planning
• Personal Financial Planning
• Family Financial Planning
• Investment Planning
• Estate Planning
• Tax Planning
• Cash Flow Planning
• Education Planning
• Risk Mitigation Planning
• Wealth Planning
• Divorce Planning

The Creation of a Comprehensive Financial Plan

When you plan for a vacation, the planning process is over when the vacation is over. When you plan for the events of your financial life, the planning process never ends, not even upon your death! We’ll break down the financial planning process into seven steps.

1. Choose an Independent Financial Advisor

The most important decision you’ll make is at the beginning, when you choose the professional with whom you will co-create your financial plan. We discuss how to choose a financial advisor elsewhere, but will cover some of the highlights here.

It might surprise you to know that there are people offering financial planning services who, a) have neither training in nor a certification for the financial planning process, b) have no college degree of any kind, c) have very little life and work experience to speak of. A step up from there might be someone who’s been through a quick certification program, yet may still have no college degree or other professional credentials, nor any meaningful professional or life experience.

Of course, you want to find someone with whom you have excellent rapport and clear communication channels. You want someone of solid character,—intelligent, trustworthy, mature, respectful. Additionally, ask yourself whether or not any of the following qualifications are important to you, and if they are possessed by the professionals under consideration:

• Do they have a university degree and possibly a post-graduate degree, such as an MBA?
• How many years have they been working in the financial planning and investment services field?
• Do they have other professional certifications, such as a CPA?
• Do they have further credentials within the financial planning and investment field, such as a PFS credential)?
• Do they have prior, diverse and meaningful professional experience?
• Have they themselves built wealth, bought a home, raised and educated a family, saved for retirement, and so on?
• Do you share their investment philosophy?
• Do they own their own business?
• Are they truly unbiased in their fee structure, as well as in how they select investments, without the conflicts of interest that arise with investment advisors who work at large brokerage firms?

What Financial Planning and Investment Management Tools Does the Advisor Use?

Not often considered in the search for a qualified financial advisor is the question of what tools they are using to assist in the creation of a comprehensive financial plan, as well as in the on-going role of investment advisor, should that service be provided as well. Software tools and systems for the advisor can range from simple systems costing a few hundred dollars, to extremely robust and complex tools costing in the thousands and tens of thousands of dollars. Consider asking candidate advisors to explain what tools they have invested in to better facilitate the planning and investment processes.

2. Clearly Defining Life Goals

Once you have selected your financial advisor, you will have one or more meetings where you’ll be asked to share many details of your life. The more your financial advisor knows about your life and your goals in life, the better he or she will be able to assist you in planning to meet those goals.

You will discuss your goals surrounding your professional and family life, having and educating children, caring for parents and grandparents, the lifestyle you care to lead today and upon retirement, when you hope to retire, and much more. Goals will be established for the short-term, medium-term and long-term. This is a personal process and speaks to the importance of choosing the best possible advisor for you and your family.

3. Gathering All Relevant Financial AND Personal Data

Your advisor will need to know the details or your present financial and personal situation. Examples of information gathered include:

• Assets owned or expected: homes, cars, bank accounts, investment accounts, retirement accounts, education savings accounts, inheritance, etc.
• Liabilities: home loans, car loans, student loans, credit card debt, etc.
• Income: Job income, spousal income, investment income, etc.
• Where, how and in what form assets, liabilities and income exist.
• Any personal information or situations that influence your financial position.

Goals and financial data are the inputs that drive the planning process. They help us create the map to get from point A to B.

4. Assessing Where You Are Today Relative to Your Goals

We now have defined points A and B, though we don’t yet have a plan how to get from one to the other. Here we take a moment to look at all the information from a number of angles, to assess the likelihood of achieving goals either at all, or within the desired timeframes. We consider priorities. Which goals are more important than others? Can some goals be modified in their nature or time-expectation, if necessary?

5. Co-Creating Your Comprehensive Financial Plan

We begin to enter the above gathered data into a financial planning system and discuss and refine details based on what the output is beginning to tell us. We may need to revisit questions, such as how much money can be realistically saved each month? What adjustments in your present-day lifestyle can be made? At what age is retirement actually possible? What is the minimum cost-of-living lifestyle at retirement that you might consider?

There will be a back and forth process between goal setting, the financial realties of earning, saving and investing, and what the calculations are telling us are possible. A fine-tuning, so to speak. Eventually, a comprehensive financial plan is created, and this plan contains within it the strategies and actions to be taken today and in the future to move your goals toward fruition.

6. Participate in the Implementation of Your Plan

Shortly after the creation of the plan, there will likely be a number of action items to be taken in the short-term. Much of this will be done by your financial advisor, such as revisions made to the investment portfolio. Some action will require your participation. Some examples could be filling out paperwork for the establishment of new retirement accounts, account transfers or for the creation of education savings plans. Another example might be the refinance or sale of a home. Yet another example may be the pay-down or pay-off of some portion of existing debt. In the future, other actions will be required as necessary.

7. Monitor and Periodically Review and Revise Your Plan

Finally, as we mentioned above, our financial life activities not only occur throughout our life, they even extend beyond our lives. As such, financial planning is a dynamic, on-going process. A competent financial advisor will be monitoring your plan and investment activities on your behalf, and will likely set a time-table for a periodic review, such as once per year. You may, of course, call your advisor when important events happen in your life, especially if they are/were unexpected.

Financial Planning requires periodic reviews and revisions, and these revisions produce a new set of strategies and actions, and you and your advisor work together to see that these actions are taken and the results monitored. In this way you are better assured that you may meet all your goals in life.

Related Articles

When Do I Need A Financial Plan?
The Contents of a Professionally-Created Financial Plan

About the Author

Todd E. Frank, CPA/PFS, MBA is the President and CEO of Frank Financial Advisors, a Registered Investment Advisory Firm (RIA) serving clients nationwide from our headquarters in Carlsbad, San Diego, California. As an RIA, Frank Financial Advisors is able to offer truly independent, fee-only financial advisory services.