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What are the six steps in the Financial Planning Process?

We all need to plan our future and find a way to manage our money to achieve our life goals. The process by which you would be able to evaluate and manage the utilization of your financial resources to the optimum is called Financial Planning.

A lot of factors are considered in the financial planning process. For example, one should consider the regular cash flow management, the need for insurance, and managing other investments. Managing investments would include pure investments, tax planning, risk assessment and also asset allocation. The services that a  professional Financial Planner offers can help with a proper evaluation of all that is mentioned above.

Let us understand the six steps in developing a Financial Planning Quizlet.

Meeting and Evaluation:

The first process is to have an initial meeting between the financial planner and the client seeking the services. Here the planner describes the kind of services that are offered and the professional fees attached to each service. The client, in turn, decides if the services spoken about fits the required parameters. If everything is as per arrangement, then the planner takes a general idea of the financial situation and the long term goals of the client. It is essential that there be mutual trust and confidence amongst both the parties.

Information harvesting:

An essential aspect of effective financial planning is gathering appropriate information by the professional about the current financial situation of the client, both in qualitative and quantitative terms. It is important to know cash flow, the long and short term financial goals of the customer and also the financial planning process to be followed. It is crucial that all steps to financial planning and goal setting are religiously followed for a robust financial plan.

Establishing financial Goals:

Once the information has been gathered about the financial situation of the client, it becomes imperative to understand what type of financial horizon the client is looking at in the future. It needs to be assessed if the goals that the client has with relation to his finance planning are achievable goals or it requires fresh planning.

Establishing financial Goals

Developing a Plan with the information received:

Next in the process is the way to develop a worthy financial plan based on the information received from the client. It is essential to note that all such information obtained from the client should be checked thoroughly for any fallacy before developing a plan. A complete analysis of the current situation of the client is required, along with the study of the projected income and other financial documents provided.

Execution of the Plan:

Once a plan is developed and goals set, execution of the plan is the next step. If the client is unable to follow the planner’s recommendation, then the entire process becomes futile. Since planning involves a gamut of task like changing the savings and investment habits of the client or purchase or sale of investments etc., it is imperative that the plan is executed in a way that it never falters.

Review the Plan:

Financial planning is a continuous process. The clients personal and financial status will always change in the future. Hence addition or deletion to the financial planning done becomes a necessity depending on the current situation of the client and to keep him/her on the tracks to achieving financial goals.

What are the seven key components of financial planning?

Every financial plan is different. Every planning is done with a different set of goals and separate timelines for achieving such milestones. It is no surprise that a stable financial planning process helps to save money and afford the things that one really wants, including achieving goals like saving for retirement and child education.

However, the key components in achieving financial goals are similar. Let us read the steps to planning finance.

Create a monthly budget to keep your expenses below your income – Always keep a check on your costs. It should never cross your income. If expenses are low, your savings grow,

Make a debt pay-off plan – While creating your budget, always remember to make plans to pay off your debts. Financing planning is vital because the sooner you are debt-free, the more you can save. Also, avoid being a spendthrift and creating unnecessary debt buckets. 

Know your bills and pay it on time – Paying bills on time is a step of the finance plan. Once you have paid off all the bills, you would know what money is there for you to spend and save.

An emergency fund – Create an emergency fund to meet your exigencies. This will help you in falling back to the funds if your current financial situation demands spending out of your assigned limits. In most cases, your emergency funds help you from eroding your investments.

Invest in the right type of insurance – Investing in insurance is a must step to be taken. Be it your health insurance or Life insurance. You should be insured at all times.

Have a diversified investment – It is essential to have a diversified investment. Taking professional help is a wise decision if you are not clear about where to invest or what step to be taken for diversifying the investments.

Savings for your short term goals – This step is many times overlooked. We only think of our mid or long term goals. To define financial plan, short term goals should always be taken into consideration and savings accommodated accordingly to meet the financial requirements.

short term goalsThe other factors that need consideration while financial planning would include:

Planning for your taxes:

You heard it right. Taxes it is. Taxes are not a welcome component; however, it needs to be paid. It is an important step to evaluate the financial condition and plan accordingly. If you do not plan for taxes, then it would have an impact on your cash flow in a significant way. Seeking professional guidance is necessary here so that your financial planning includes tax savings investments. These investments help in acting as a tax shield and hence help you to save and take care of your taxes at the same time. Reiterating the fact that professional help would ensure that your plan for taxes is appropriate.

Estate planning:

Creating an estate plan is not something that many people consider. It is a crucial part of your financial planning since it deals with your assets after you are gone. In other words, this kind of financial planning deals with listing all your assets, creating a will and making it accessible to those people who you think should have access to, after you are gone. Professional guidance is a must in this type of planning.

The Financial Planning process is an integral part of setting your finances on the right track. No two financial planning are similar; however, the basic components are alike. It is imperative that one not only creates financial plans but also incorporates the same in the daily lives to bring about the change that one wishes to have and achieve the short, medium and long term goals.

Margaret Epling

Margaret Epling is a financial journalist at CapitalBay.News. She is an active member of the CapitalBay.News community and is passionate about finance, technology and cryptocurrency.

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