Name a strategy that household decision makers use to improve their lifestyles. Survey says: “Financial Planning!”
Financial planning is a dynamic process comprised of six steps. Though your financial goals may evolve over the years due to shifts in your lifestyle or circumstances such as an inheritance, career change, marriage, house purchase, or a growing family, the financial planning process remains the same. As you consider how best to manage your financial future, it will help to understand the process. The make-up of a comprehensive financial plan includes six elements. By definition, the process is never-ending. Your financial plan, if established completely, will outlive you, not ending with your demise.
This month’s Investor’s Edge column kicks off a six-part series. Each part will hopefully help you gain a greater understanding and appreciation of the financial planning process. From what I learned in my studies with the College for Financial Planning in 1989 and 1990 to become a CFP®, here are the six subject areas of the process:
- Financial statement preparation and analysis
- Insurance planning and risk management
- Investment planning
- Income tax planning
- Retirement planning
- Estate planning
Step one is: “Financial statement preparation and analysis.” For the next five months, I will share the other steps to comprehensive financial planning. One of my favorite quotes on financial planning is: “Planning is bringing the future into the present so that you can do something about it now.” Alan Lakein said that in his classic book, How to Get Control of Your Time and Your Life.
Planning helps people build savings for life goals, makes them comfortable with their lifestyle and more confident in managing their money, and better prepared to face the future. It doesn’t necessarily take a lot of money to garner these benefits, and both high- and low-income individuals, or net worth, find that the homework involved in financial planning is worth the effort and leaves them better off financially. The process of financial planning begins with step one, “Financial statement preparation and analysis.” Author and educator Stephen Covey said two things, among many others, that we can apply to this process: “Start with the end in mind,”and, “The main thing is to keep the main thing the main thing.” My favorite book of Mr. Covey’s is, First Things First. Here’s the first thing to the financial planning process:
Step 1: Financial statement preparation and analysis.
This step includes cash flow analysis/planning and budgeting. Many may recall from basic accounting how to determine “Net Worth.” Simply subtracting total liabilities from total assets. Hopefully, the result is “in the black,” or a positive number. This would be an amount that your assets exceed your liabilities. In summary, your net worth is the difference between what you own and what you owe. This provides a snapshot of your financial situation at any point in time. With this, you have your personal balance sheet. As the CEO, Compliance Chief and head of Internal Audit of YOU, Inc., that is one financial statement you should insist on regularly reviewing.
There are many reasons why knowing your net worth is important and beneficial. A few essential benefits are this awareness will help you to spend wisely, help develop a plan to pay down debt, and encourage you to save and invest more. Regardless of your financial situation, knowing your net worth can help you evaluate your current financial health and plan for your financial future. You will be closer to living by the wisdom of Messrs. Lakein and Covey. By knowing where you stand financially, you will be more mindful of your financial activities, better prepared to make sound financial decisions and more likely to achieve your short-term and long-term financial goals. We all have financial parameters and constraints unique to us. An honest assessment of your asset and debt picture is necessary to identifying your constraints and avoid unwanted financial pitfalls.
An effective financial plan should be regularly updated to reflect any changes that will affect your financial life to keep you on track to achieving your goals.
I hope you enjoyed part one. Look for part two in the June issue of ALIVE Magazine.
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