What is the Financial Planning Process?
There are commonly six steps to the financial planning process that are used by the majority of financial planners when developing plans for their clients; however, these steps can also be used by the individual investor as well.
These six steps are easy to remember with the acronym EGADIM.
- The first step is establishing the goal and the relationship between investor and financial planner. The planner or advisor typically asks open-ended questions to discover everything the client wishes to accomplish, as well as his/her own knowledge about the process. Among these open-ended questions are:
- How do you feel about investing in the stock market? In bonds? In other securities?
- What are your financial strengths and weaknesses?
- How are you planning for retirement?
The purpose of this step is to create a foundation and purpose of the planning itself with a concrete financial destination in mind. Far too many people save and/or invest money without a specific and concrete goal. Thus, with a financial goal in mind, the financial planner can help the investor find the tools and instruments necessary to achieving said goal.
- The second step is gathering relevant information. This step helps the financial planner identify and provide the appropriate strategies, financial products, and tools to reach the investor’s goals. Relevant information includes such things as:
- Risk tolerance
- Time frame
- How far along the investor is in his/her goals?
- Amount of savings
- Amount of life insurance
- Whether the investor has a will
- Children and their ages
- Third is analyzing data. Once the information is gathered, the next step is to analyze said information. There is a wide range of free online financial calculators where you can input the numbers to see if your proposed retirement amount is going to be enough, whether your retirement goal is achievable, and any other potential questions you may have.
- The fourth step is developing a plan of action. Once you have a goal in mind and analyzed existing data, you will have a clearer picture as to whether your plan will achieve your desired goal. Perhaps you may have to increase your savings rate per month or adjust your fund portfolio to better achieve your goals. Whatever course of action you and your financial planner may choose, the key is to understand the variables, evolve with your needs, and remain within your risk tolerance and financial capabilities.
- Fifth is implementing the plan. Now is the time to put your plan to work; however, this is perhaps the most difficult step in the entire financial planning process. Getting started is, by far, the most important aspect of success. Whether you are contributing a few dollars into just one fund or investing hundreds into a more diverse portfolio, the fundamental point is to make your goals achievable but not too far out of your comfort zone in the beginning.
Once you have your numbers and a workable plan developed, it takes discipline to actually put the plan into action and not fall prey to procrastination.
- The final step is monitoring the plan. Just like any other plan, a financial plan will evolve over time and change according to life events. Once the plan is created, it must be monitored and tweaked occasionally to remain relevant to your life. Marriages, divorces, career changes, children, tax law changes, inflation, stock market fluctuations, recessions, and more all require newer perspectives on how best to maintain your goals.
These six steps can also be applied to any personal finance area including:
- Estate planning
- Tax planning
- Cash flow/budgeting
- Insurance planning
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Chesapeake Investment Planning, LLC is not affiliated with Kestra IS or Kestra AS.
Todd Wilhoit contributes articles for Investopedia.com. See this one and more here.