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Financial Planning: A Beginner’s Guide

August 16, 2024

8 min Read

Written by Brooke Barley

Edited by Susan Kim

Wide shot of millennial couple lounging in their living room, planning out their finances and looking at their account via online banking.

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GOBankingRates reached out to financial experts about how to create a financial plan, and many of them referenced the six steps in the financial planning process, according to the Certified Financial Planner Board of Standards. Here’s what those steps are and how the experts suggested navigating them.

What Is Financial Planning?

According to the CFP Board, “Financial planning involves looking at a client’s entire financial picture and advising them on how to achieve their short- and long-term financial goals.”

In other words, it’s a comprehensive way to incorporate all of a client’s lifelong financial needs into a single package, including:

Saving for retirement
Planning vacations
Buying a house
Having children and paying for their education

What Is a Financial Plan?

A financial plan is the road map that guides investors on their path through a lifetime of financial needs.

It is the final product of the financial planning process and puts into writing the steps that investors need to take to fulfill all of their financial goals.

It should have concrete steps for how to achieve the goals enumerated in the financial planning process, such as how to manage:

Income
Spending
Investments
Debt

Having a written document can be invaluable, as it provides specific steps or rules for how to handle different financial situations that arise in life without having to go through the entire planning process again. However, it’s also important that a financial plan remains flexible, as you can never exactly plan out how your life is going to go.

What Are the 6 Steps in the Financial Planning Process?

Here are the six steps in the financial planning process, according to the Certified Financial Planner Board of Standards.

6 Financial Planning Steps

Understand personal and financial circumstances
Identify and select goals
Analyze the current course of action
Develop and present financial planning recommendations
Implement the financial planning recommendations
Monitor progress and update

1. Understand Personal and Financial Circumstances

Jenna Biancavilla is a wealth advisor and owner of Pearl Capital Management. She says you can start to understand how you’re doing by taking a look at your budget and cash flow.

“This knowledge not only empowers you in making financial decisions but also helps differentiate between essential needs and discretionary wants. Your budget forms the foundation for calculating your emergency fund (three to six months’ worth of expenses) and determining the amount needed to achieve financial freedom, also known as retirement.”

2. Identify and Select Goals

When thinking about your goals, Joseph Doerrer, VP of wealth planning at Mezzasalma Advisors, says you don’t have to think of them in terms of finances. “Individuals I’m working with will often share with me a goal for their life that’s not strictly financial, but there’s a financial strategy that will come to me that I can use to match to that goal to make it more attainable.”

Here are some common financial goals that you might consider:

Buy a house
Pay for your children’s college education
Go on a dream vacation
Fund your retirement
Start a business
Get out of debt

Choose goals that resonate with you and that you would be excited to accomplish.

3. Analyze the Current Course of Action

Now that you have your goals set, you have to figure out how to accomplish them. You might decide to pick up a side job, or adjust your budget so you can meet your goals. Sort your goals into the following groups:

Short-term goals that you can meet in less than three years
Mid-term goals that you can achieve in three to 10 years
Long-term goals that take longer than 10 years to reach

Then choose the best saving or investing vehicle for each of these goals. Liquid investments — savings and money market accounts, Treasury bills and some certificates of deposit — can be a good choice for short-term and some mid-term goals.

The longer you have to save, the more risk you should be able to take. Long-term investments — stocks, mutual funds and stock exchange-traded funds — are better reserved for long-term and some mid-term goals.

The tricky part is figuring out future costs. You may need to use some tools to do this, such as a financial calculator. For example, the College Board offers a cost calculator to help you estimate the cost of paying for college for your children.

Similarly, you can use a retirement calculator to estimate how much money you should put aside to maintain your lifestyle in retirement.

4. Develop and Present Financial Planning Recommendations

A financial planning professional can help you assess your finances and get you going in the right direction. Before you meet with one, make sure you know what you want to get from the interaction.

When you need financial planning help, many resources are available. Here are some to consider:

Professional organizations, such as the National Association of Personal Financial Advisors, maintain lists of fee-only financial planners who have met certification requirements.
Groups like the Foundation for Financial Planning connect people with free and low-cost financial planning services.
The U.S. government offers financial advice and resources on several sites, including Investor.gov and Consumer.gov.

There’s no better time than now to create a financial plan. Out of all the personal financial planning steps, getting started is the most important. Once your plan is established, monitor its progress so you can adjust it as needed.

5. Implement the Financial Planning Recommendations

Making a sound financial plan doesn’t work if you don’t take the advice you’re given. You have to put the plan into action.

“Once the recommendations are finalized, this step involves putting the plan into action by executing various strategies, which may include adjusting investment portfolios, setting up retirement accounts, creating emergency funds and implementing appropriate insurance coverage,” said Mark Reimet, CFP at Ocean City Financial Group.

6. Monitor Progress and Update

Remember, your financial plan is a work in progress. Go back and revisit it at least once a year or whenever something significant happens in your life.

Here are the most common life events that signal it’s time to reevaluate your plan:

Marriage
Divorce
Birth or adoption of a child
Death of a family member
Job loss

Probably the most important characteristic of a good financial plan is flexibility. It’s all but inevitable that over the years you encounter some financial surprises or emergencies, and it’s key to be prepared for them so that they don’t derail your overall plan. While you can never predict which financial emergencies you will encounter, you should incorporate their occurrence into your plan.

For example, if you lose your job or move to a more expensive area, it’s entirely possible that you might take on some high-interest debt. Allocating funds for this scenario can help you from falling too deep into a hole.

Whatever financial emergency you encounter, go over your financial plan again and make adjustments where necessary.

Types of Financial Planning Help

Financial planning comes in a wide variety of types. The good news is that savers and investors can pick and choose the type of financial planning help that best suits their own individual style.

Online Financial Planning Services

Online financial planning services are the most basic option you can choose. These services are often free or may come with a minimal fee.

These services can organize your portfolios, educate you about your financial plan and make suggestions as to what path to take. Some come in the form of an app and may offer additional services, such as savings rewards and/or investment options.

Financial Advisors

Financial advisors are the traditional option when it comes to planning. When you meet over a phone call or video chat, an advisor can give you personal advice as to how to structure your plan, and may even draft an entire plan on your behalf.

Full-service financial advisors typically charge higher fees, but this may be worth it if you’re looking to develop a comprehensive plan and/or are unfamiliar with how to invest successfully.

Portfolio Management Services

Portfolio management services take all of the work out of your hands and build actual portfolios of investments designed to match your financial objectives and risk tolerance. The most basic option is a robo-advisor, which builds a portfolio of various ETFs based on your self-provided investment needs and risk tolerance.

On the more expensive end, professional money managers can build you a tailored portfolio incorporating specific stock selections, ESG considerations or other priority needs, such as tax management.

John Csiszar and Karen Doyle contributed to the reporting for this article.

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