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What Are The Steps In The Financial Planning Process?

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What Are The Steps In The Financial Planning Process?

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Over the years, I’ve realised that coming up with a personal finance planning process can be stressful, especially if you do not know where to begin. It wasn’t till I learned the 6-step financial planning process that I got some direction and felt secure about my financial future. 

Sure, I was making sure I saved some money, invested as much as I could, and kept my debt low. Still, without a concrete plan in place, I did not know if my allocations were optimal. Building a financial plan helped me set realistic goals to aspire to. 

The 6-Step Financial Planning Process

The financial planning process involves six key steps that must be followed. These six steps act as a roadmap in the personal financial planning process.

Step 1: Evaluate Your Current Financial Situation 

Before you begin your long term financial planning process, you need to evaluate your current financial situation. Doing so will help you understand where you should begin. 

Step 2: Determine Your Risk Profile 

Every person has a different risk profile. Some people are very comfortable with taking risks, while others not so much. Understanding your affinity for risk-taking will help determine what your investment portfolio should look like, as well as how much debt you are willing to take on.

Step 3: Set Financial Goals 

Once you evaluate your current financial situation and determine your risk profile, you can finally start setting your financial goals. You need to make sure these goals are realistic and honest. These goals can be broken into -

  • Short-term goals - These include creating a monthly budget, paying off your credit card, creating an emergency fund, etc.
  • Medium-term goals - These goals include saving for your marriage, buying a new car, building an investment portfolio, etc.
  • Long term goals: Long term goals include things like buying your own house, saving enough money to retire, etc

Step 4: Have A Contingency 

While having a financial plan is a great step in the right direction, it is not without its set of challenges. Things may not always go according to plan. You may have to shell out a lot of money on a new vehicle if your car breaks down. You may lose your job. 

It is advisable to have 6 - 12 months' worth of expenses saved in an emergency fund in situations like this. These savings will give you enough time to get back on your feet. If you do need to use money from your emergency fund, you should replenish it whenever possible. 

Step 5: Implement Your Financial Plan

The penultimate step to your financial plan is to implement it. It is one thing to conjure up financial planning process steps, but following through with this plan is where a lot of people tend to fail. Being diligent and disciplined with your money is crucial for financial freedom in the long term.

Step 6: Review & Revise

There is still one last step to follow once you’ve put your plan into action. It is important to recognise that the socio-economic environment changes as time goes on. What may have been a sound investment yesterday may become null tomorrow. Your standard of living might change as you age. Factors like these make it important to revisit your financial plan and review it periodically. If you feel the need to revise a previous strategy, go ahead and make the necessary changes.

In a Nutshell

Financial freedom doesn’t mean being able to splurge on goods and services you don’t need. It means having the ability to enjoy your life while maintaining a reasonable standard of living. It’s true that money cannot buy you happiness. However, a lack of money can become an obstacle in the way of your happiness. Make the smart decision and start building a financial plan today.

Frequently Asked Questions

1. What are the six steps in the financial planning process?

Step 1: Evaluating and determining your current financial situation

Step 2: Evaluating and determining your risk profile

Step 3: Evaluating and determining your short, medium & long-term financial goals.

Step 4: Setting up a backup fund in case of an emergency

Step 5: Executing your financial plan

Step 6: Periodically reviewing your current plan and making necessary revisions. (If applicable)

2. What is financial planning and its process?

Financial planning is the act of creating a vision for your financial future and following through on it. The financial planning process is evaluating your net worth and risk profile, setting short to long-term financial goals, and revising your goals over time, if necessary. It also involves strategies on how to retire without having to worry about finances and securing your family’s future.

3. What is the first stage of the financial life cycle?

The first stage in the financial life cycle is the accumulation of wealth over time. This is the stage where you just begin working and are early in your career. In this stage, you do not generally have any family or friends that depend on you to work. People in this stage of the financial life cycle may or may not have outstanding debt. 

This stage is where you should try to pay off your debt and start planning for your financial future. It is wise to start saving and investing as early as possible.

4. What are the stages of the financial life cycle?

The financial life cycle has four stages.

Stage 1: Early career - Begin accumulating wealth and paying off debts

Stage 2: Mid-career - Managing wealth and investing

Stage 3: Late career - Retirement planning 

Stage 4: Retirement- Planning your wealth distribution and family security

Being a geek is good when it comes to money. Read on!

1. What is a financial plan? How can I make one?

2. Importance of personal finance planning

3. Financial planning in India in 2022

4. What is investment planning and how to prepare for your future

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