How To Financial Planning|Financial Planning Process

Posted on May 07th, 2009 in How-To, personal finance

According to Wikipedia, a financial plan can be a budget, a plan for spending and saving future income. In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement). However, we are not going to touch about financial plan in business but more focus on personal financial planning.

Why Financial Planning?
In general, financial planning process is a process that required proper management, regular monitoring and evaluation of personal financial status. Financial Planning is important because it helps you to understand your life goals which involve money such as buying a home or car, investing, saving, retirement planning. By understanding the financial planning process, it gives you a greater sense of financial security especially in this uncertain economic downturn.

Steps of Financial Planning Process

Financial Planning Process

1. Where You Are?
Evaluating your current financial situation by compiling personal cash flow statement to estimate your personal net worth. The simple formula is:
Your income(salary, bonus, investment income) – Your expenses(tax, outstanding credit card payment, personal loan) = Personal net worth

If your personal net worth is positive, congratulations to you as you are on the way to achieve financial freedom. However, if the result is negative, please sit down and review again your financial plan properly. Trying to develop good financial planning habits such as learning money saving tips to get you out from the valley of debt. Please be honest to yourself while evaluating your personal net worth as it’s really important to develop your long-term financial goals.

2. Set Goals
By now you should able to develop some financial goals after knowing your personal net worth. Most people have a few goals, some short term and others long term. For example, “I want to retire earlier at age 45 with a personal net worth of $1000000” It’s fine to have a few goals but you need to prioritize which goal to achieve first before moving to the second goal. If you are uncertain of which goal to achieve first, kindly consult with a financial planner who can help you to discover your own values and make it easier for you to prioritize the goals.

3.Financial Plans
Draft a financial plan with details of plans and strategies on how you going to achieve your goals. Please be specific on your plans and strategies, let’s take an example below:

Plan – Buying a house in 3 years from now.
Strategy – save money

Do you see what’s the major problem with the above strategy? By mentioning save money only is a failure strategy, you need to mention how much money you’re going to save every day, week, monthly and also identify how you going to achieve it. All these details will help a lot in your financial planning process.

4. Take Action
Actions speak louder than words. It’s useless if you do not take action to achieve your planned financial goals. I assume that you have decided the best plan for your goals and what you need to do now is to implement plans and strategies. It needs your perseverance and discipline to manage financial plans. You can always seek for assistance from financial planner to reach your life goals.

5. Monitor Progress
This is the last and most important step in financial planning process. You should monitor your progress as time goes by to see if any changes need to be made in order to achieve you primary financial goal – Financial Freedom.

Conclusion
Please keep in mind that you are in charge of financial planning if you are working with a financial planner, he/she is a professional who can guide you on investment decision making but you are the one who need to understand the financial planning process and start planning as soon as you can in order to achieve your financial goals.