These steps could also be learned and applied by individuals for their own benefit if they wanted to act as their own nonprofessional financial planner.
What Are the 7 Steps of Financial Planning?
The seven steps of financial planning start with getting to know the client’s current financial situation and goals and end with continually measuring performance toward those goals and updating them as necessary.
Step 1: Understanding the Client’s Personal and Financial Circumstances
The CFP begins their financial planning process by asking their clients questions designed to help them get a clear picture of who the client is and what they want. Some of the questions are qualitative and lead to a better understanding of the client’s health, family relationships, values, earnings potential, risk tolerance, goals, needs, priorities, and current financial plan. Some of the questions are quantitative and lead to a better understanding of the client’s income, expenses, cash flow, savings, assets, liabilities, liquidity, taxes, employee and government benefits, insurance coverage, and estate plans. The advisor may ask open-ended questions to uncover necessary information to start the plan. This information may include a range of topics, from financial goals to feelings about market risk to dreams about retiring in the Caribbean. The advisor will also analyze the client’s financial information to ensure they have a clear understanding of where their client stands.
Step 2: Identifying and Selecting Goals
The advisor will use their financial expertise to help their client select goals. They’ll ask clarifying questions to help identify those goals. For example, what is your time horizon? Do you want to accomplish this goal in five years, 10 years, 20 years, or 30 years? What is your risk tolerance? Are you willing to accept a high relative market risk to achieve your investment goals, or will a conservative portfolio be a better option for you? Together, the financial planner and client will prioritize which goals are most important.
Step 3: Analyzing the Client’s Current Course of Action
Next, the advisor will analyze the client’s current course of action to see if it’s moving them toward their financial goals. If it’s not, the advisor will identify alternative courses of action and let the client know the advantages and disadvantages of each option.
Step 4: Developing the Financial Planning Recommendation(s)
The financial planner selects one or more recommendations that they believe will help meet the client’s goals. They evaluate each recommendation, considering:
What assumptions were made to develop the recommendationHow the recommendation meets the client’s goalsHow it integrates with other aspects of the client’s financial plansHow high a priority the recommendation isWhether the recommendation is independent or needs to be implemented with other recommendations
Step 5: Presenting the Financial Planning Recommendations
In this step, the financial planner presents the recommendations and the thought process behind the recommendations. This helps the client make an informed decision about whether the recommendations are a good fit.
Step 6: Implementing the Financial Planning Recommendation(s)
Implementing the plan means putting the plan to work. But as simple as this sounds, many people find that implementation is the most difficult step in financial planning. Although you have the plan developed, it takes discipline and desire to put it into action. You may begin to wonder what may happen if you fail. This is where inaction can grow into procrastination. If the financial planner has implementation responsibilities, you’ll also clarify what those are so you know exactly what steps your CFP is taking on your behalf.
Step 7: Monitoring Progress and Updating
It’s called “financial planning” for a reason: Plans evolve and change just like life. Once the plan is created, it’s essentially a piece of history. This is why the plan needs to be monitored and tweaked from time to time. Think of what can change in your life, such as marriage, the birth of children, career changes, and more. These life events may require new perspectives or changes to your financial plans. Now think about events or changes beyond your control, such as tax laws, interest rates, inflation, stock market fluctuations, and economic recessions. Your CFP will work with you to ensure your plan is meeting your goals, and if it’s not, they’ll recommend changes.
The Bottom Line
Now that you know the seven steps of financial planning, you can apply them to any area of personal finance, including insurance planning, tax planning, cash flow (budgeting), estate planning, investing, and retirement. While you can do it yourself, professionals can provide invaluable advice and a neutral perspective on your finances. Whether you do it yourself or hire an advisor, remember to keep referring back to the steps as significant life or financial changes occur. You may also want to do what professional financial planners do and sit down and reevaluate your plan periodically, such as once per year.
