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Understanding the Financial Planning Process

financial planning process

“If you fail to plan, you are planning to fail.” That quote – originally uttered by Benjamin Franklin and now printed on school-issued homework planners nationwide – may not have been originally conceived as a lesson in personal finance, but it absolutely applies. One of the best ways to make a financial plan is to find a financial advisor – and SmartAsset’s free financial advisor matching service can help you find one that fits your needs in just a few minutes. No matter what your age, income, occupation or level of knowledge, a solid financial plan made working with a professional is an important step making sure you are able to live your life comfortably not just now but when you get older as well. If you’re not sure of what working with a financial planning professional will be like, though, here is a basic walk-through of what you can expect.

Financial Planning Process Step One: Understand the Situation

The first step in any financial plan is to figure out what your current financial situation is. Your advisor will ask you to take stock of all of your assets, including cash, investments, retirement accounts, cars, homes and anything else of financial value. Just as importantly, you’ll take stock of all your debts and liabilities. This includes credit card debt, student loans, mortgages, car payments and any other money you owe to a lender.

This step may seem rote, but in many ways it is the most important part of the financial planning process. If you don’t take accurate stock of your existing financial situation, there is no way you can make a plan that will help you achieve both short- and long-term financial goals.

This is also the part of the process where you and your advisor should discuss fees. Your advisor likely will charge an asset-based management fee which will be expressed as a certain percentage of your total assets under management. If this is the only way your advisor makes money, this professional is a fee-only advisor. If the person also earn commissions for selling securities or insurance products, this professional is a fee-based advisor.

Financial Planning Process Step Two: Think About Your Goals

Now that you know where you are financially, you have to think about where you want to be. This means figuring out your financial goals both short-term and long-term. Your advisor will work with you to figure out what your goals are, but try to go into your first meeting with a sense of what you are trying to accomplish.

Some examples of a short-term goal could be buying a new home, going on a vacation or purchasing a new car. Some examples of long-term goals could be paying for your children to go to college, purchasing a vacation home or financing your retirement.

You’ll also need to prioritize your goals so that your advisor has somewhere to start as they build your plan. If you really want to be able to buy a house in five years, you may be steered towards some more aggressive investments that will get you the cash you need, whereas if funding education for your children is your most important goal, more of your investment money will go into longer horizon investments that will pay out further down the road.

Financial Planning Process Step Three: Analyzing the Financial Situation

financial planning process

Now that you and your advisor have taken stock of your assets and debts and established goals, it’s time for some serious analysis. Your advisor will take all of the information you’ve provided – which will also include your income and any other cash flows you’re expecting – and figure out some possible courses of action to get the most out of your finances both right now and in the future.

Financial Planning Process Step Four: Develop and Present a Plan

Here is where things get real. After the analysis is complete, your financial advisor will put together a plan he or she thinks makes the most sense for you and your family. Chances are that your advisor will bring you a few different options and you’ll be able to choose what you think will work best for you.

This plan will have many layers, but there are a few things to think about so you know how to pick the asset allocation path that will be the best for you. First, your advisor may have possible paths broken down by their level of aggressiveness. A conservative plan will be low-risk but have the lowest possible rewards. An aggressive plan will take more risks, but have a greater chance of big gains long-term. A moderate plan will be balanced somewhere in between.

There will be multiple elements to the plans presented to you. Your advisor should have plans for all of your goals. For instance, if paying for a college education for your children is one of your goals, they should help you set up a 529 plan. If you want to invest, they’ll draw up a diversified portfolio. If you want to save for retirement, they may set up an individual retirement account or help you invest in a workplace retirement plan like a 401(k), if you have access to one. If insurance is part of your plan, the advisor will present a plan for purchasing the right products.

After hearing your options, you’ll give your advisor an O.K. and he or she will be on to the next step.

Financial Planning Process Step Five: Implementing the Plan

Now, your advisor will actually take the steps outlined in your plan. He or she will make investments, create accounts and deposit funds as needed. This step may come with additional charges to you, either from your advisor or from a third party, in the form of brokerage fees or commissions.

That’s pretty much it for the initial financial planning process. There is, however, one more step – and it’s one that doesn’t really have an easy end point.

Financial Planning Process Step Six: Monitoring and Adjusting

financial planning process

The world changes all the time, and you’ll want your financial plan to adjust as it does. If you employ your financial planner on an ongoing basis as an asset manager, they’ll monitor your portfolio and make changes as needed. If a stock reaches new highs but seems like it might go down at some point, they’ll sell to make a profit. If you have another child and need more insurance, your advisor can adjust that.

If you have a discretionary relationship with your advisor, he or she can make these adjustments without running them by you first but is always required to act in your best interest. If you have a non-discretionary account, all changes will be run by you first. This may give you some peace of mind, but it also may slow down the process for quick portfolio rebalancing or time-sensitive investments.

The Bottom Line

The financial planning process is simple, but has a lot of moving parts. Make sure you take your time at the beginning to find a financial planner you are comfortable with – after all, you’re literally putting your entire financial life in your advisor’s hands. Your advisor should communicate with you throughout the process, and if you are an active and engaged partner, your chances of achieving your goals are much higher.

Financial Planning Tips

  • Finding a financial advisor may seem like the hardest part of all of this, but it doesn’t have to be. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool connects you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors, get started now.
  • Taxes are an important part of any financial plan. Get a sense of what your income tax bill may look like with SmartAsset’s free income tax calculator.

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