Events in life tend to run in cycles. If you or if you knew someone that was affected by the recent economic recession, you know first hand that this happens in the financial world as well. Fortunately, a renewed confidence has emerged within most American households as we know many people who are setting their sights on long term goals that may have seemed out of reach just a few short years ago.

These long term goals could range anywhere from an early retirement, a college education for your children, or it could simply be purchasing that large ticket item (new car, house, business property, real estate investment) that you've had your sights on for some time. However, ambition alone does not lead to achieving a long-term goal. We like to think of these long goals as destinations in life that require a map and a way to get there. But, if you only have a limited amount resources and a muddled map, you are more than likely to come up short. That's where financial planning comes into help.

What exactly is Financial Planning

All of us have certain things in life we want to accomplish and many of them require financial resources. These are called financial goals. Living a secure and enjoyable retirement is a goal shared by most people. In addition to that, most parents want to be able to provide a college education for their children, buy a bigger house, or expand their business. And while working towards all of those goals, they want to ensure the financial security of their loved ones. These all become the inner workings of piecing together your financial puzzle.

A financial plan is about carefully shaping those pieces and fitting them in their proper place so that they work effectively together towards your vision. If a piece is missing or doesn’t fit quite right, it could skew all of the other pieces. As you become financially successful, more pieces are needed to complete the financial puzzle, such as risk management, tax strategies, and estate planning. Because of their impact on the total financial puzzle, it is critical to have a well-conceived, integrated plan.

The financial planning process enables you to focus clearly on your specific goals while addressing all of your concerns so they are no longer obstacles. And, having a well-conceived, comprehensive financial plan enables you to shutout the constant drone of doom and gloom, because, in the long-term, your plan is all that matters. 

4 Steps in the Financial Planning Process

The financial planning process involves four essential steps that, if followed correctly, will increase the likelihood of achieving your long-term goals; however it does require discipline, patience and devotion when following these basic financial principles.

Establish Clearly Defined Goals

Very rarely does anything of financial importance happen accidently. In reality, absent a clearly defined, quantifiable goal that’s set along a realistic time horizon, chances are it won’t happen. Your goals need to be both realistic and inspiring enough to motivate you to action. It’s not enough to know what it is you want to achieve, you need to have a deep sense of why it’s important, and how it would make you feel when it’s achieved.  To set a realistic goal, envision it, quantify it (what you need to save), and make sure you have the resources to fund it.

Assess Your Current Financial Situation

Financial planning is a continuous process of assessing where you are currently in relation to your goals. This enables you to make the adjustments in your strategies necessary to keep you on track. Your financial picture is comprised of a balance sheet (assets and liabilities) and a cash flow statement (budget and savings). Your objective is to constantly improve your financial picture – reduce debt, increase cash flow/savings, grow your assets - which could enable you to achieve your goal early, or enable you to target additional goals.

Create an Actionable Plan

A financial plan is typically comprised of several strategies, each designed to address a different piece of your financial puzzle. Developing a systematic savings and investment strategy for accumulating the funds needed for your goal is obviously a key part of your financial plan.  But, life happens, and your financial plan should also include strategies for dealing with life’s contingencies, such as an accident or illness, or even a premature death in the family that could derail the plan.

Priorities have to be established in order to shore up all aspects of the plan. Before allocating all of your resources towards your financial goal you need to create an emergency fund to cover at least six months of living expenses, and an insurance plan to protect your finances in the case of a disability or death of a family member. Each priority should have an actionable plan to achieve it.

Monitor and Measure Your Plan

The biggest mistake many people make is to create a financial plan and then put it on the shelf. A financial plan is a living, working document that needs to reflect your current circumstances as well as the impact of a changing environment. It becomes a benchmark against which your progress to your goals is measured.

As your personal circumstances change and evolve, your plan needs to be updated, and, very likely, strategies will need to be updated or added (i.e. increases in insurance amounts, a change in your asset allocation, a new tax reduction strategy). The more frequently you assess your situation and measure your progress, the more minor any adjustments to your strategies will be.

Seek Professional Guidance

Although financial planning is not rocket science – there are plenty of resources available to develop your own – it can become more daunting than the average person is able or willing to tolerate. The body of knowledge required to navigate multiple disciplines (i.e., investments, insurance, taxes, retirement planning, estate planning, etc) is beyond the capacity of most people. In addition, most people lack the discipline and patience to strictly adhere to a plan, especially when their emotions get the upper hand.

A competent financial advisor can more efficiently guide you through the process of planning your future, designing your strategies and navigating the complex universe of investments and financial products. Of equal importance, he or she can also be your financial coach, holding you accountable to your plan while coaching you through your emotions and encouraging you to the finish line.