Financial Planning
You may have come across the term "financial planning" recently and wondered what it means. You may have decided to start your own financial plan but you're not sure how. Or you may feel it's time you went to a financial planner for some professional advice. Whatever your situation, the following information can help you decide what's right for you.
What is Financial Planning?
Financial planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a home, saving for your child's education or planning for retirement.
The financial planning process as described by CFP Board, consists of six steps that help you take a "big picture" look at where you are financially. Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals.
The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans.
The Benefits of Financial Planning
Financial planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you payoff your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of a whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.
Can You Do Your Own Financial Planning?
Some personal finance software packages, magazines or self-help books can help you do your own financial planning. However, you may decide to seek help from a professional financial planner if:
- you need expertise you don't possess in certain areas of your finances. For example, a planner can help you evaluate the level of risk in your investment portfolio or adjust your retirement plan due to changing family circumstances.
- you want to get a professional opinion about the financial plan you developed for yourself.
- you don't feel you have the time to spare to do your own financial planning.
- you have an immediate need or unexpected life event such as a birth, inheritance or major illness.
- you feel that a professional adviser could help you improve on how you are currently managing your finances.
- you know that you need to improve your current financial situation but don't know where to start.
What is a Financial Planner?
A financial planner is someone who uses the financial planning process to help you figure out how to meet your life goals. The planner can take a "big picture" view of your financial situation and make financial planning recommendations that are right for you. The planner can look at all of your needs including budgeting and saving, taxes, investments, insurance and retirement planning. Or, the planner may work with you on a single financial issue but within the context of your overall situation. This big picture approach to your financial goals may set the planner apart from other financial advisers, who may have been trained to focus on a particular area of your financial life.
The Financial Planning Process
ESTABLISHING AND DEFINING THE CLIENT-PLANNER RELATIONSHIP.
The financial planner should clearly explain or document the services to be provided to you and define both his and your responsibilities. The planner should explain fully how he will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made.
GATHERING CLIENT DATA, INCLUDING GOALS.
The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, how you feel about risk. The financial planner should gather all the necessary documents before giving you the advice you need.
ANALYZING AND EVALUATING YOUR FINANCIAL STATUS.
The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.
DEVELOPING AND PRESENTING FINANCIAL PLANNING RECOMMENDATIONS AND/OR ALTERNATIVES.
The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate.
IMPLEMENTING THE FINANCIAL PLANNING RECOMMENDATIONS.
You and the planner should agree on how the recommenda-tions will be carried out. The planner may carry out the recommendations or serve as your "coach," coordinating the whole process with you and other professionals such as attorneys or stockbrokers.
MONITORING THE FINANCIAL PLANNING RECOMMENDATIONS.
You and the planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes.
Best Practices When Approaching Financial Planning
- Set measurable goals.
- Understand the effect your financial decisions have on other financial issues.
- Re-evaluate your financial plan periodically.
- Start now - don't assume financial planning is for when you get older.
- Start with what you've got - don't assume financial planning is only for the wealthy.
- Take charge - you are in control of the financial planning engagement.
- Look at the big picture - financial planning is more than just retirement planning or tax planning.
- Don't confuse financial planning with investing.
- Don't expect unrealistic returns on investments.
- Don't wait until a money crisis to begin financial planning.
Securities and financial planning offered through LPL Financial, member of Securities Investor Protection Corporation (SIPC). For an explanatory brochure, please visit SIPC.org. LPL Financial is also a member of FINRA and An Investment Advisor.
