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What Is Financial Planning? Definition, Meaning and Purpose

A financial planner checks her own accounts.

Financial planning is the process of taking a comprehensive look at your financial situation and building a specific financial plan to reach your goals. As a result, financial planning often delves into multiple areas of finance, including investing, taxes, savings, retirement, your estate, insurance and more. As you might expect, a financial planner typically offers financial planning services, though financial advisors often double as planners themselves. To find an advisor who can help you build a financial plan, try SmartAsset’s free financial advisor matching tool.

What Is Financial Planning?

Financial planning is the practice of putting together a plan for your future, specifically around how you will manage your finances and prepare for all of the potential costs and issues that may arise. The process involves evaluating your current financial situation, identifying your goals and then developing and implementing relevant recommendations.

Financial planning is holistic and broad, and it can encompass a variety of services, which we detail below. Rather than focusing on a single aspect of your finances, it views clients as real people with a variety of goals and responsibilities. It then addresses a number of financial realities to figure out how to best enable people to make the most of their lives.

Financial planning is not the same as asset management. Asset management generally refers to managing investments for a client. This includes choosing the stocks, bonds, mutual funds and other investments in which a client should invest their money.

However, the same professionals who offer asset management services can also offer financial planning. A financial planner is effectively one type of financial advisor. Advisors can earn certifications focused on financial planning, the most notable of which is certified financial planner.

Understanding the Different Types of Financial Planning

A couple talks with their financial planner.

A financial planner may offer a variety of services to you. These services will often be considered in concert with one another. This helps the planner put together an overall plan that considers all aspects of your current situation and future aspirations.

Here are eight common services that are generally offered as part of financial planning:

  • Tax planning: Financial planners often help clients address certain tax issues. They can also figure out how to maximize your tax refunds and minimize your tax liability. Certain advisors may also be able to actually help you with preparing your taxes and filing your annual taxes.
  • Estate planning: Estate planning seeks to make things a bit easier for your loved ones after you die. Preparing a will may be part of a financial planner’s services. Estate planning also helps prepare for any estate tax you may be subject to.
  • Retirement planning: You presumably want to stop working someday. Retirement planning services help you prepare for that day. They ensure that you’ve saved enough money to live the lifestyle you want in retirement.
  • Philanthropic planning: It’s always nice to give something to people who need it or help a cause close to your heart. Financial planning can help you ensure you’re doing it efficiently and getting all the tax benefits you’re eligible for.
  • Education funding planning: If you have children or other dependents who wish to pursue a college degree, you may want to help them to pay for it. Financial planning can help make sure you are able to do so.
  • Investment planning: Though financial planning doesn’t have to include the actual management of your assets – but most often does – it can still help with your investment portfolio by mapping out how much you should be investing and in which types of investments.
  • Insurance planning: A financial planner can help you evaluate your insurance needs. Some financial planners are also licensed insurance agents and can sell you insurance themselves. However, they’ll likely earn a commission, which would create a conflict of interest.
  • Budgeting: This is perhaps the cornerstone of financial planning. A planner can make sure you are spending the right amount given your income and can also make sure that you aren’t going into debt.

The exact services offered by a financial planner will vary based on the individual. Make sure the financial planner you choose offers the services you need.

What’s Part of a Comprehensive Financial Plan?

The most important thing your financial planner will do for you is right their name: putting together a financial plan for you and your family.

A financial plan is a complete overview of the steps you’ll have to take to achieve the goals you lay out for yourself. These objectives could include paying for your children to go to college, giving to charity, paying for a comfortable retirement or maximizing the amount of money you pass down to your children.

Your financial planner will help you create a financial plan after talking to you about your goals and needs. Then they’ll engage in a variety of services, described in the section above, to help you achieve your goals.

How to Make a Financial Plan

Here are four key facets of a sound financial plan.

Gauge your net worth – Add everything you own and tally up everything you owe. This includes physical assets like cars and residences, and financial assets like stocks, bonds, IRAs and 401(k)s. The upshot is your net worth. Once you have a sense of what you’ve got, you’ll be in a position to make a plan.

Establish financial goals – Step One in the process is making specific goals. This should be an inclusive, encompassing funding education, meeting healthcare expenses, creating an emergency fund, planning for retirement  and creating an estate plan.

Monitor cash flow – This is often the most challenging part of making a financial plan, partly because many of us don’t pay particularly close attention to every dollar and dime we spend and partly because it may not be fun to get up close and personal with your discretionary spending.

Create pathways to each of your financial goals – In some cases that will mean moving money into high-yield savings accounts, which as of June 2023 were offering up to 4.85% APY. In other cases it will mean paying down debt, starting with the highest-cost debt, such as credit card debt. It may also mean adjusting your spending.

How Much Money Do You Need for Financial Planning?

A financial planner calculates the discounted cash flow of a possible investment.

The cost of financial planning depends largely on the advisor you work with and that advisor’s fee schedule. Many financial advisors who offer financial planning services will do so on either a flat fee or hourly fee basis.

A flat fee means you’ll pay a single fee for all financial planning services. Your total fee will likely depend on the complexity of the financial planning services you require. An hourly fee structure means you’ll pay a set fee for each hour of work that your advisor puts in.

A financial advisor or financial planner who offers both financial planning and investment advisory services may charge a wrap fee. This means you’ll pay a single rate for the advisor’s services, transactional fees and custodial fees. Wrap fee rates are generally based on a percentage of the client’s overall assets under management (AUM).

Bottom Line

Financial planning is about looking at all elements of a person’s financial life and coming up with a plan to help you as an individual meet your responsibilities and achieve your goals. It can include a number of services such as tax planning, estate planning, philanthropic planning and college funding planning. You might pay based on an hourly fee, a flat fee or an asset-based fee.

Tips for Your Financial Plan

  • Financial planning is extremely important, but it can be intimidating to do it on your own. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Before even talking to an advisor, you can think about how you want to potentially divvy up your investable assets. Use this free asset allocation calculator to figure out the right balance for you based on your risk tolerance.

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