The Financial Planning Process: What You Need To Know

Love it or hate it, if you want to achieve financial success, you need a healthy dose of personal financial planning.

If you’re anything like me, you probably have big dreams for your life. You can clearly visualize them, and you’re constantly working your butt off to try to reach them.

But these dreams often intersect with our financials because they can only be achieved if we have the financial capacity to make them happen. Hence the need to have a roadmap, a plan, for our future financial and life goals. 

Now get this: You are 2.5X more likely to save for retirement if you have a financial plan. The correlation between financial planning and financial success is undeniable. 

So let’s jump right in and learn more about what a financial plan is, the key components of a financial plan, and how you can create one, because the best time to create a financial plan was yesterday. The next best time? You guessed it, that's today!  

What Is A Personal Financial Plan?

A personal financial plan is a detailed overview of your current money situation, short-term and long-term financial goals, and the steps you will take to achieve them. 

Most importantly, a good plan is highly individualised to reflect your personal and family situation. It encompasses things like your earning potential, investment plans, risk tolerance, tax plans and more. 

But more about the components of a financial plan later. 

You might be reading this and find it very overwhelming to even think or read about creating a financial plan, let alone doing it. But please don’t hit the snooze button on your finances. 

No one expects you to prepare a plan in one day - creating a financial plan is a process. I won’t lie and tell you that it’s easy to build a financial plan and  stay on track. If it was, everyone would consider themselves financially secure (on the contrary, according to a recent study by Fidelity, 60% of Americans are concerned about their finances).

What I can tell you is that your future self will be very thankful if you take the time and effort to do it.  

What Are The Key Components Of A Financial Plan

I'm sure you figured it out already, but a good financial plan entails a whole lot much more than budgeting and tracking your investments. It takes into account all of the major areas of your financial life. Each component plays an individual role and collectively, they should give you a clear understanding not only of your current financial standing but also your projected finances.

These components might be categorized differently from person to person, but I like to bucket them into these 6 pillars of a financial plan. Some of these might sound familiar. 

The 6 Pillars of a Financial Plan

  • Income & Expenses
  • Savings & Investments 
  • Assets & Liabilities
  • Retirement Planning 
  • Tax Planning
  • Risk Management



Income & Expenses
  • Cash Flow 
Savings & Investments  
  • Emergency Fund
  • Savings Rate
  • Investment plan and vehicles
  • Asset Allocation 
Assets & Liabilities
  • Financial Goals
  • Net Worth
Retirement Planning 
  • Annual Expenses upon retirement
  • Sources of Income - Savings & Investments
  • Withdrawal rate from your Savings & Investments 
Tax Planning
  • Tax-Efficient Investing
Risk Management
  • Insurance 
  • Estate Planning

Create A Financial Plan in 10 Steps

  1. Consider your SMART financial goals
  2. Track and understand your current cash flows
  3. Start an emergency fund
  4. Calculate and track your net worth 
  5. Determine your investment strategy and plan
  6. Pay-off your high-Interest debt 
  7. Retirement planning
  8. Tax reduction strategy
  9. Insurance coverage
  10. Estate planning

1. Consider your financial goals

Whether we outright spell them out or not, we all have financial goals.  Want to take that trip to Hawaii? Maybe you want to save up enough to put a down payment for your dream house. These are financial goals. 

A good financial plan is guided by your financial goals. But just having goals is not enough. Your goals need to be smart, well-defined, and measurable.

Like anything else, these goals can change as your life progresses, but the idea is to always know what you are working towards each week, month, year, and so on, with regard to your money. Break those big goals into smaller, more manageable steps, and see how fast you will begin to achieve your goals, and how motivated you will be!

Related: How to set SMART financial goals

2. Track and understand your current cash flows

Listen: It doesn’t matter if you’re living pay-check to pay-check or earning a six-figure salary. If you want financial security, you'll need to understand where your money is going. 

I'm going to take a leap of faith here and guess that you've heard of a budget. But unlike what you might have heard, budgeting isn’t about restricting yourself. 

Budgeting is quite simply a plan for how you will use your money both now and in the future so it gives you the freedom to spend money on the things you love. 

Budgets can also help you understand your cash flow - money coming in and money going out. 

If you already have a budget, that’s great, refer to it to determine your current monthly cash flow (income and expenses), how much you’re saving and investing, and your debt pay-off. 

Alternatively, refer to your credit and debit card transaction histories over the last few months to get a sense of your monthly cash flows if you don’t have a budget. 

Related: 7 reasons why you absolutely need a budget

3. Start an emergency fund

Personal finance experts disagree on a lot of things, but an emergency fund is one thing that they all get behind. And for good reason. Having an emergency fund is the backbone of any financial plan.

It can be especially crucial to have a financial buffer if you are already in debt to avoid relying on high-cost solutions such as credit cards. With the average credit card interest currently at 16.12%, you probably ( definitely? ), want to avoid being in a position of having to borrow during an emergency. 

Ideally, the goal is to have about 3 - 6 months of your essential expenses in your emergency fund, but a good place to start is $1000, which can cover basic emergencies.

That said, with the average cost of an emergency in 2020 at $3,518, it is evident that $1000 should only be the beginning. Grow your emergency fund over time to fit your and your family’s needs. 

Remember, this is your financial plan and your emergency fund. There is no wrong amount to save for your emergency fund, as long as you hit the 3 months of essential expenses minimum that is recommended. Some people save 3 months of expenses, others up to 3 years of expenses. When deciding what works for you, think about your risk tolerance, financial goals, the health of your family - anything and everything is fair game to factor in. The goal is for you to feel comfortable about what you have stashed away for a rainy day. 

Related: Emergency Funds: What you need to know

4. Track your net worth 

Guess what? Tracking your money isn’t just about monitoring your spending and understanding your cash flow. 

If you want to grow your wealth, you need to track your net worth

That’s right! 

You need to track the difference between your total current assets (home, car, cash in the bank, investments), and your total liabilities (car loan, outstanding mortgage, credit card debt, student debt). 

Think about it: What better way is there to accurately measure your wealth? 

What’s more, tracking your net worth can be a great motivator! Seeing growth in your net worth as a result of increased savings and growing investments (hello compound interest!) can truly propel you forward on your road to financial freedom.  

5. Determine your investment strategy and plan

If you want a shot at becoming wealthy, you need to do more than simply earning and saving money. 

You might be thinking that this is not the right time for you to look into investing. Well, think again!

If you would like to build your wealth, you will need to grow your money. And the best way to grow your money is by investing. What's more is that these days, you can start with as little as $100!

Some key tips to keep in mind when it comes to planning your investments include: 

  • Maximizing your retirement accounts. A National Study of Millionaires found that 80% of net-worth millionaires in the study said that investing in their employer-sponsored retirement plan was the main way they reached millionaire status. 

  • Having a long-term mindset. Time in the market is better than timing the market. That's thanks to compound interest, which allows your balance to snowball over time.

Investing is a long-term strategy to build wealth. You should not try to time the market by buying low and selling high. Not even the most advanced investors can consistently beat the market.

  • Thinking about your risk tolerance. You might have heard it said that investing involves risk. This is as true as it is important to think about your risk tolerance prior to investing.
    Risk tolerance is just a fancy way of saying how much of your investment you can really afford to lose. Different investments come with different levels of risk. In order to minimize risk, you can utilize asset allocation - the allotment of your capital assets to various investments - in a way that balances the risks and rewards. 

Related: Investing guide for beginners

6. Pay-off your high-Interest debt 

Whereas investing is a very important part of your financial health, you need to ensure that you are in good shape before you start investing. If you have a credit card debt, with the average credit card interest currently at 16.12%, you likely want to attack that first. At such a high interest, it is very likely that the debt will drain your resources because there is no investment that will consistently outperform such high APR. 

Building credit is another way to set yourself up for financial success. Unlike having a bad credit score which can bring a whole baggage of financial problems, good credit gives you options when you need them - like the ability to get a decent rate on a mortgage and getting you cheaper rates on insurance.

7. Retirement planning

No matter what is included in your individualized financial plan, you should include a strategy for accumulating the income that you need upon retirement. 

So where do you start? 

You might have guessed it! A good place to start is by figuring out how much you will spend annually upon retirement. According to a study by Fidelity Investments, you can expect to spend 55 - 80% of your current pre-retirement income upon retirement, primarily depending on your retirement lifestyle and health care costs. 

Other factors to consider are how much income you can expect from social security, pension, etc, and how much you can expect to withdraw from your savings and investments each year (the rule of thumb is 4% of your retirement portfolio). 

8. Tax reduction strategy

It might be easy to overlook taxes when doing projections for your income or investments over the coming years. Factor taxes into your projections, and strategize on how you will reduce your tax burden, such as the capital gains tax, to the extent that the tax code allows. 

The Schwab Center for Financial Research evaluated the long-term impact of taxes and other expenses on investment returns, and while investment selection and asset allocation are the most important factors that affect returns, the study found that minimizing taxes also has a significant effect.

Tax-efficient investing can allow you to minimize your tax burden and maximize your returns. Investments that lose more of their returns to taxes - aggressive investments with higher return potentials - are better suited for tax-advantaged retirement accounts. 

This is because some accounts, such as the 401(k) allow you to defer paying income taxes on the money you save for retirement, allowing you to have more money in the account, and consequently, more growth as a result of compounding interest

Related: What is Tax-Efficient Investing?

9. Insurance coverage

Life happens. Have you noticed?

The most unexpected and unfortunate things can happen, undoing years and years of hard work. A fire could consume a house in flames in a matter of minutes, and just like that, something that took years to acquire could be gone.

That is why it is important to protect yourself and your family from life’s unexpected moments. You need to get the right insurance to cover all your valuable things such as your health, home, car, and business.  

10. Estate planning

If there is one thing that’s certain, it’s that we all die. 

Sad, but true.

Estate planning is a plan for what happens to your assets after you are gone. It is essential to have a plan for what happens to your assets when you’re gone.

This involves listing out your assets, including beneficiaries in your relevant accounts and profiles, and creating a will. You can work with an estate lawyer to get these in order. 

BONUS Step 11. Review frequently and re-adjust as you go

A financial plan isn’t meant to be a static document. 

Different things may impact your ability to stick to your financial plan, hence the need to review your financial plan frequently, and to re-adjust your goals as you go. Rather, rinse and repeat. 

Final Thoughts

Listen: You are 42% more likely to achieve your goals if you write them down. Writing helps you visualize your future, prioritize, and understand the impact that your actions now can have on your future. 

Start by writing out the main SMART financial goal for this year, kick off the financial planning process around it then go from there. 

Creating a financial plan might just be one of the best decisions you make this season. I can almost guarantee it!

Creating a Financial Plan (The Financial Planning Process)

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