A financial plan goes beyond budgeting for regular expenses. It’s the process of managing short- and long-term finances. Taking good financial planning steps now can mean the difference between achieving your financial goals and living paycheck to paycheck.

                By                    Karen Doyle

Certified Financial Planners follow a set of steps to create recommendations for their clients. With some modifications, you can use the same process to develop your own financial plan.

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What Are the 6 Steps in the Financial Planning Process?

Here are the six steps in the financial planning process, according to the Certified Financial Planner Board of Standards:

You may see variations with lists of five or seven steps, but the underlying principles are the same. Any of these lists of financial planning steps can be a model for your own personal financial plan.

6 Financial Planning Steps

  • Understand personal and financial circumstances.
  • Identify and select goals.
  • Analyze the current course of action.
  • Develop and present financial planning recommendations.
  • Implement the financial planning recommendations.
  • Monitor progress and update.

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Step 1: Set Your Financial Goals

The financial planning process starts when the planner establishes a relationship with you to learn about your goals, lifestyle and values. It’s worth the time to explore these ideas on your own.

When you’re working toward a specific goal, you’re more likely to stick to habits that will get you there. Take some time to think about the financial goals you want to reach. Here are some to consider.

You can — and should — have short and long-term goals. If something is important to you, write it down.

Financial Goals To Consider

  • Buy a house.
  • Pay for your children’s college education.
  • Go on a dream vacation.
  • Fund your retirement.
  • Start a business.
  • Get out of debt.

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Step 2: Put a Price Tag on Your Goals

In the first step, you identified the goals you want to achieve in the future. Next, figure out how much you’ll need to save to accomplish your goals.

The tricky part is figuring out future costs. You may need to use some tools to do this, such as a financial calculator. For example, the College Board offers a cost calculator to help you estimate the cost of paying for college for your children.

Similarly, you can use a retirement calculator to estimate how much money you should put aside to maintain your lifestyle in retirement.

Step 3: Figure Out What You Have To Work With

Goals are great, but you also need to know your starting point. Consider how close to or far from your goals you are right now. Start by determining your assets, which gives you a big-picture look at your financial health.

Calculate Your Net Worth

Subtract your liabilities from your assets to calculate your net worth. Assets are anything with monetary value, including:

  • Real estate
  • Bank accounts
  • Stocks

Liabilities are what you owe lenders. They include:

  • Mortgages
  • Car loans
  • Student loans
  • Credit card debt

Don’t include rent, utilities or other ongoing monthly costs, which are expenses.

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Calculate Your Income

Write down all of your income. You can use your gross or net income.

  • Gross income is your income before deductions like taxes and anything else that is taken out of your paycheck, like health insurance and retirement plan contributions.
  • Net income is the amount of money you receive after taxes and deductions.

Using net income is easier for some people because it saves you time. Working with gross income means you need to add taxes and payroll deductions to your list of expenses.

Step 4: Figure Out Your Expenses

Get out your bank and credit card statements and categorize everything you spend. This includes the following monthly bills:

  • Rent
  • Car payment
  • Student loan payments
  • Utilities
  • Phone service
  • Food
  • Clothing
  • Car insurance

Remember that you must add payroll taxes and other deductions to your list of expenses if you used your gross income in the previous step.

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Step 5: Save and Invest To Build Toward Your Goals

Your financial plan is an outline of the saving and investing you will do to reach your financial goals. This will vary, depending on the amount of time you have to save and the amount of risk you’re willing to take.

Sort your goals into the following groups:

  • Short-term goals that you can meet in less than three years.
  • Midterm goals that you can achieve in three to 10 years.
  • Long-term goals that take longer than 10 years to reach.

Then choose the best saving or investing vehicle for each of these goals. Liquid investments — savings and money market accounts, Treasury bills and some certificates of deposit — can be a good choice for short-term and some midterm goals.

The longer you have to save, the more risk you should be able to take. Long-term investments — stocks, mutual funds and stock exchange-traded funds — are better reserved for long-term and some midterm goals.

Build an Emergency Fund

Strategic financial planning steps may include actions for improving your immediate financial situation. One of your first short-term goals should be to build an emergency fund if you don’t already have one.

Reduce Debt

Another important short-term — or even midterm — goal is to reduce your debt. Borrowing money costs money. The interest you pay on credit card balances and other loans could be going toward your financial goals.

Advice

Ideally, you should have enough money to cover three to six months’ worth of expenses in your emergency fund. Having this reserve of cash will help you avoid putting bigger goals on hold.

Take a close look at your expenses. Come up with a plan to reduce your credit card balances and pay off high-interest loans.

Step 6: Implement Your Plan and Adjust as Needed

Remember, your financial plan is a work in progress. Go back and revisit it at least once a year or whenever something significant happens in your life.

Here are the most common life events that signal it’s time to reevaluate your plan:

  • Marriage
  • Divorce
  • Birth or adoption of a child
  • Death of a family member
  • Job loss

Go over your calculations again and make adjustments where necessary.

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Are Financial Planners Worth It?

The decision to work with a financial planner or create a DIY plan is personal. Before you decide, make sure you understand the pros and cons of hiring a professional financial planner.

Pros of Working With a Financial Advisor

A professional financial advisor brings expertise to the table. Here’s how hiring one can benefit you:

Hiring a professional isn’t the right decision for everyone. Here are some of the drawbacks:

Benefits:

  • Get clarity on decisions: A professional is not emotionally tied to your financial decisions.

  • Save time: Financial planning and analysis take time, especially with complex financial situations. A professional does the research for you.

  • Gain better returns: People who work with financial advisors can see better returns than people who take the DIY route.

  • Build a valuable relationship: A professional can work with you for years and guide you through life changes.

  • Cost: You have to pay for the services.

  • Time: You need to schedule a time to meet with your financial advisor.

  • Uncertainty: You may question whether the recommended plan benefits you or the advisor more. Note that fee-only financial planners do not make a commission on products and services they recommend, so their advice is more likely to be unbiased.

Types of Financial Planning Professionals

Several types of financial planners are available, and it’s important to choose one that can best serve you and your goals. Here is a quick look at some of the financial planners you may find:

  • Accountants
  • Insurance agents
  • Investment advisors
  • Certified Financial Planner
  • Estate planners
  • Attorneys
  • Stockbrokers

How To Get Financial Planning Help

When you need financial planning help, various resources are available. Here are some to consider.

  • Professional organizations, such as NAPFA.org, maintain lists of fee-only financial planners who have met certification requirements.
  • Groups like the Yellow Ribbon Network and Foundation for Financial Planning connect people with free and low-cost financial planning services.
  • The U.S. government offers financial advice and resources on several sites, including the U.S. Securities and Exchange Commission and Consumer.gov.

There’s no better time than now to create a financial plan. Out of all the personal financial planning steps, getting started is the most important. Once your plan is established, monitor its progress so you can adjust it as needed.

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Last updated: July 1, 2021

  • Financial Planning Standards Board.
  • “Financial Planning Process | FPSB.”
  • Certified Financial Planner Board of Standards. 2019.
  • “The First Three Steps of the Financial Planning Process | CFP.”
  • Vanguard.
  • “Retirement Income Calculator - Vanguard.”
  • Investor.gov.
  • “Asset | Investor.gov.”
  • IRS.
  • “Gross Income.”
  • FINRA.
  • “Financial Planners | FINRA.org.”