Financial Planning Process: The 5 Steps to Success

November 9, 2021
investment strategy

We’ve all got our own unique financial goals.

For you, it might be buying a new car, sending a child to college, upgrading to a larger home, or going on the trip of a lifetime.

You’ve heard about how important it is to financially plan for your future if you want to achieve these goals. The message might’ve come from relatives, friends, or even from television commercials.

Most of the time, though, that advice doesn’t come with any practical information about how to actually do it. There’s more to the financial planning process than simply saving extra money.

To make your goals a reality, you’ll need to use a financial planning process that actually works.

This article will teach you how to take control of your current financial situation and use a step-by-step financial planning process to turn your dreams into reality.

What's Involved in the Financial Planning Process?

Financial planning is about approaching money in a step-by-step way. It helps you to create a roadmap that plans out and allows you to achieve your financial goals.

You can create a financial plan either by yourself or with the help of a professional.

Being in control of your income, expenses, and investments helps you manage your money better and more effectively achieve your goals.

Financial planning isn’t just for those with a high net worth. Anyone can benefit from creating a financial plan for themselves. With today’s online services, it’s easier and more accessible than ever.

It’s important to keep in mind that financial planning is an ongoing process. You can’t simply make a plan and stick to it for the rest of your life. Things change, and your financial plan will need adapting and updating as they do.

Your financial plan will also need to be highly customized based on your risk tolerance, future expectations, and family situation.

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6 Reasons Why Financial Planning is Important

Let’s take a look at six reasons why you should have a financial plan: 

1. Counter inflation and increase your savings

You might be disciplined enough to set aside some money for savings every week or month. But if you’re leaving your savings as cash, its purchasing power (how much it’s able to buy) is decreasing over time.

Inflation will slowly chip away at your cash savings and reduce the number of products or services that money can pay for each year. 

If you don’t have your savings in investments that are earning you at least 2-3% per year, the value of your money will gradually decrease in the long term.

2. Be better prepared for sudden expenses

Unexpected expenses can pop up at a moment’s notice. It might be your car suddenly breaking down and needing an expensive part. If you own your home, you may need to replace your furnace or repair a leaky roof from time to time.

Financial planning allows you to take inventory of these risks in your life and start preparing for them, so you aren’t caught off guard.

If you know that your furnace is 15 years old, there’s a good chance that it'll need to be replaced within the next few years. Good financial planning includes being aware of these potential costs and setting some money aside each month to pay for them. That way, you won’t be completely caught off-guard and left with a huge bill.

3. Reduce the amount of tax you pay

A good financial plan doesn’t just include increasing the amount of money that you’ve got coming in. It also includes minimizing the amount of tax you pay.

Your decisions about when you should sell your house, sell shares of a company, or begin taking money out of your retirement plan will affect the amount of tax you pay.

Your financial plan should include potential tax consequences of your actions. That way, you can prevent paying more tax or penalties than you need to.

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4. Save for a child’s education 

Sending a child to college is expensive. If you can start saving for their education early, you’ll help prevent either yourself or the child from needing to take out loans or find other ways to pay for school.

5. Create peace of mind

Living paycheck to paycheck is stressful. By using financial planning to create a “rainy day fund,” you can save money in case you’re laid off from your job or become unable to work. 

Knowing that you’ve got a way to pay for rent and food for at least a month or two without a job will make sure that you’re not left scrambling if the worst happens.

6. Build wealth

You may want to build wealth to create a better standard of living for yourself or to ensure you can leave a sizable gift for your children when you pass. 

If you want to aim for something greater, you’ll need money to do it. That might be upgrading to a larger house, buying a new car, or building generational wealth to leave to your children.

Can You Complete the Financial Planning Process by Yourself? 

The good news is that, yes, you can complete the financial planning process all by yourself.

It might take a bit of research and reading to understand your options and find what’s best for you. However, it’s easier nowadays than ever to take control of your own financial planning process.

There was less available for consumers in terms of tools, information, and financial advice in the past. Hiring a certified financial planner or financial advisor was almost a requirement to build wealth. But now, there are online tools that can help you take personal control of the process.

Apps like EarlyBird allow you to start building wealth for a child in your life. You can set up an account and start saving for them in just a few minutes.

Even if you’re a total beginner in the stock market, EarlyBird simplifies the entire process into something that you can easily understand. All you have to do is pick from a few different expertly crafted EFT-based portfolios that match your life goals.

5 Steps of the Financial Planning Process

Here’s a walkthrough of the five steps of the financial planning process: 

Step 1: Understand your current financial situation

Before you can set your future goals and figure out where you’re going, you need to figure out where your finances currently stand.

Creating a budget will give you a clear picture of how much money you’ve got coming in each pay period, what you’re spending it on, and what you’ve got leftover.

Itemizing your spending into different categories, like utilities, restaurants, and travel, will quickly reveal where most of your money is going. That allows you to quickly rebalance your spending if you notice that you’re spending $300 per month on coffee, for example.

To start saving toward your goals, you’ll need some money left over at the end of every month after you’ve covered all of your expenses. 

If you’re currently just breaking even, then you’ll need to find a way to either cut out some of your expenses or increase your income.

Step 2: Write down your financial goals

Your goals should be quantifiable and achievable with a clearly defined timeframe.

We recommend using SMART goals to create each of your financial goals. The SMART acronym stands for

Specific: What is it you want to accomplish?

Measurable: How will you know once you’ve reached your goal?

Achievable: Will you realistically be able to accomplish your goal?

Relevant: Does your financial goal align with your values and other long-term objectives?

Time-bound: When do you want to accomplish it?

breakdown of what SMART stands for
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An example of a bad goal would be something like, “I want to save $100,000.” There is no time frame associated with it, nor any mention of how you’ll accomplish it.

An example of a good goal that uses the SMART framework would be: 

“I want to save $100,000 over the next 25 years by saving $200 per month and earning a 5% rate of return on my investments.”

$200/month over 25 years at 5% annual return equals over $119k
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Your financial goals can be anything from saving to send a child to college to paying off your mortgage. 

When writing down all of your financial goals, it’s important to separate your needs from wants. You need to know what goals are must-haves and which would just be nice as something extra.

Be sure to include your spouse or any other important decision-maker when setting long-term financial goals to make sure that you agree.

Step 3: Look at the different investment options 

There’s a huge array of options when it comes to choosing between investments.

Your investment choices will have consequences, so it’s important to fully understand before allocating your money. 

Different kinds of investments have different risk profiles, expected returns, fees, and other details to keep in mind. Every investment you make also has an opportunity cost since it’s money you could’ve put into something else.

First, you’ll need to decide on what type of investment account you’d like to use, based on your financial goals. You can always have multiple different investment accounts, with each serving a different purpose. Here are some examples:

  • College savings funds like a 529 plan or Coverdell ESA.
  • Custodial accounts like a UTMA or a UGMA that allows you to save for a child until they reach the age of majority.
  • Retirement accounts like a 401k or Roth IRA.

Different investment accounts will have restrictions on what types of assets you can or can’t hold within the account. 

Some popular investment asset classes include:

  • Stocks
  • Bonds
  • ETFs (exchange-traded funds) and mutual funds
  • Annuities
  • Options
  • Real estate
  • Physical metals like gold and silver
  • Cryptocurrencies
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A healthy portfolio is typically diversified and holds multiples of the items listed above in different proportions as a way to manage risk.

If this step seems like too much to handle on your own, you can reach out to a financial planner. They can evaluate your current situation and provide financial planning recommendations for you. 

Or you can choose a managed fund that will diversify your portfolio for you based on your goals and risk appetite. For example, EarlyBird offers five different diversified portfolios ranging from conservative to aggressive. 

Step 4: Create and implement a customized plan for you 

There’s no one financial plan that’s right for everyone. You have to take several factors into account, such as your age, financial goals, risk appetite, and type of investment accounts that you’ve got.

If you’re starting a college fund for your newborn baby, you’ll likely want a portfolio more heavily weighted toward holding stocks. 

While stocks can be volatile, they tend to appreciate in value faster than things like bonds or annuities. Since the child won’t need to attend college for 18 years, it doesn’t matter as much if your investments swing up or down by 5% per year.

In contrast, someone who is about to retire will probably want a safer retirement portfolio with a larger proportion allocated to bonds and other assets that provide a steady return without much uncertainty.

Step 5: Re-evaluate and revise your plan

Financial planning isn’t a “set it and forget it” process. You’ll need to monitor your financial plan regularly to ensure that you’re still on track and that it makes sense for your current goals.

Over time, what’s important to you might change. Any number of life situations like the birth of a child, getting married, desire to buy a home, or getting a promotion will require revising your financial plans.

Start Your Financial Planning Process Today

You don’t need a financial planner to start working on your financial goals. The average person can start their personal financial planning journey on their own with the technology available today.

Your financial plans should be all-encompassing. They aren’t just about you; they’re important for everybody in your life that you care about as well, like the kids in your life.

EarlyBird is the easiest way to start investing in the children that you love. It doesn’t matter if you’re a parent, a family member, or a friend. Our app makes it easy for anyone to start planning for a child’s financial future.

Download the EarlyBird app today, launch an investment account, and see how simple it is to start building wealth for the child you love.

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