Personal Financial Planning: Understanding the Process
A technical definition of financial planning is the process of determining your financial goals, looking at your current situation, and devising strategies for achieving those goals. It’s best viewed as a process because it will need to be updated as your life changes.
I like to think about it like a jigsaw puzzle. In this metaphor, the individual pieces (investments, accounts, insurance policies, cash, etc) are very important, but not as important as what the puzzle is supposed to look like.
Without having the picture on the box to work from, it’s very difficult to put the puzzle together.
The first step is to figure out what the puzzle is supposed to look like (your desired financial life), then put the pieces in the right place (to open the right accounts and make the proper investment decisions).
If you’ve ever seen a child work on a jigsaw puzzle, you know it’s possible to jam the incorrect piece in the incorrect location. This is also true of financial planning; it’s possible (and all too common) to put the wrong financial vehicle in your plan.
Ideally, you’ll get clear on how you want your financial future to look, and follow a proven step-by-step process to get the results you want. And it’s that process I want to share with you today, here’s what we’ll cover:
- Designing your puzzle
- Getting the right pieces
- Putting your puzzle together
- Making it real and sustainable
Briefly, I’ve been a Financial Advisor for over 20 years and am honored to have been named to Investopedia’s list of the Top 100 Financial Advisors many years running.
Let’s get started.
Designing your puzzle
Oftentimes, people incorrectly think the accounts or investments are the most important part of financial planning. When in fact, making sure you’re ready to engage in the process is the most important step.
Memories and beliefs
We all have beliefs about money that come to us through our DNA, early childhood experiences, and all the downloads we’ve picked up through life. In order to get where we want to go with money, we need to get to the heart of our core money beliefs.
Think about your earliest money memories; how were your family experiences with money? I know I came from an environment where money was scarce. That scarcity mindset stayed with me until my mid 30s, when I finally realized I had it.
Once I recognized my feelings around money, I was able to address the limiting beliefs I had, and to move past them. To figure out yours, recognize when you’re triggered and then trace back what it was that did it and why. This will help you to start the process.
Patterns
We’re creatures of habit and we follow predictable patterns. Some of these serve us, and some do not.
When you start to pay attention and recognize your patterns around money, you’ll be able to identify opportunities to change the bad ones, and replace them with good ones. For example, perhaps you’re in the habit of going out for lunch everyday like I was. For me, it was simply a matter of convenience more so than something I truly enjoyed.
Being able to find and eliminate negative patterns, no matter how small, can have a big impact over the long-term.
Current level of financial literacy
The world of personal finance is enormous. What’s your current level of understanding? As you move forward in the financial planning process, you may find you want to learn and understand certain areas, and delegate others.
Either way, it’s a smart decision to equip yourself with basic knowledge of personal finance so you can be an active participant in the process.
Knowing your facts
When it comes to your personal finances, your facts are your cash flow, budget and risk tolerance. These are three basic, easy to overlook, and fundamental areas.
When talking about cash flow, we simply need to be paying attention to what we’re spending our money on. We live in a time when everyone wants us to sign up for a monthly subscription. If we’re not careful, we’ll subscribe ourselves to living paycheck-to-paycheck.
Budgeting is one of the least popular things I talk about. I still don’t love it, but I recognize the importance of it. Simply put, it’s creating a plan for our money. Without one, we won’t know if we’re on track to meet our goals and objectives. We won’t know if we can afford to do things.
Understanding your risk tolerance is important so you can invest properly, as well as sleep at night. Being too aggressive can result in anxiety, being to conservative can slow your growth.
Values
Our values inform how we allocate our most important resources like time, attention and money. It’s essential we get clear on what ours are. Without completing this step, how will we know if we’re living our values or not?
To help you in this process, you can access our Values course at no-cost.
Goals
In order to get where you want to go, you have to know where you want to go. I intellectually understood the value of goal setting for many years; but never did it.
It literally took me to age 35 before I ever wrote down a goal. Whether you’re a little ahead of me, or a little behind me, you need to get clear on what you want your financial future to look like.
To help you in this process, you can access our Goals course at no-cost.
Getting the right pieces
Once you have an idea of what the puzzle is supposed to look like, it’s time to get the right pieces, and put them in the right places.
Asset allocation is an important part of investing, so is asset location. This means you must not only have the right types of investments, but you must own them in the right places.
I like to think about our financial lives in three stages; protection, accumulation and distribution.
Protection
During the protection phase, we’re setting our financial foundation. We need the proper insurance, liquidity, and legal protections.
Accumulation
During the protection phase, we’re saving and investing to reach our goals.
- We have IRAs and 401(k)s for retirement planning, where we commonly invest in mutual funds.
- We have checking and savings accounts for our emergency funds, where we hold cash for liquidity.
- We have 529 plans for kid’s educations, where we commonly invest in mutual funds.
- We have taxable brokerage accounts, where we commonly invest in investments like mutual funds, ETFs, stocks, bonds, and cryptocurrency.
- We buy real estate to live in, as well as for investment.
Distribution
In the third stage, we design our retirement income plan. It’s a challenging thing to accumulate enough assets to be able to stop working, and another challenge creating enough income that will last for as long as we need it to.
Putting your puzzle together
We know what it’s supposed to look like, we’ve got the right pieces, now it’s time to put the puzzle together.
Habits
We talked about patterns earlier, and it’s essential we develop beneficial financial habits. If, after going through your planning process, you’re on track to meet your goals, great! If not, you’ll have to change some of your habits to ensure you’ll get on the right track.
Automation
The more we can automate menial financial tasks, the better. Here are some key areas to automate:
- Automatic contributions to your 401(k) or IRA
- Automatic escalation of deferral percentage to your retirement account
- Automatic bill payment
- Automatic transfers between your bank accounts to fund your short, mid and long-term objectives
- Automatic credit card payments
On top of that, I also encourage you to schedule recurring meetings on your calendar to monitor your finances. When you’re just getting started, you should have a monthly meeting to review your cash flow and budget. Once you’re on top of things, and have established good habits, you can move to quarterly meetings.
Conclusion
If you get one takeaway, let it be this: You need to become the CEO of your financial life. There will never be anyone who is more interested in your financial success than you are.
Even if you decide to outsource some or all of your financial planning, you still need to be the one driving the process.
We’ve developed a DIY Financial Plan Workshop for those people who are interested in doing it themselves. It’s structured as a 14 Day Sprint, as well as an On-Demand online course that can be completed however you choose.
I’m interested in helping people get better at money so they can live how they want. Let me know how we can better serve you!
Resources mentioned
If you’re ready to take control of your financial life, check out our DIY Financial Plan course.
We’ve got three free courses as well: Our Goals Course, Values Course, and our Get Out of Debt course.
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Check out the LifeBlood podcast.
You can access our Goals and Values Courses at no cost.
If you’d like help getting on the same page with your partner, check out our Same $ Page Course.
If you’d like to help your kids get good with money, check out our Teaching Kids about Money course.
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