Financial Planning: The Five Steps of Financial Planning
Financial planning isn't actually all that complicated--at least in theory. When you boil business planning down to its very essence, the planning consists of five discrete steps:
The First Step of Financial Planning: Guaging Your Current Financial Condition
The first step of financial planning is to identify your existing assets and liabilities and the difference between the two, which is your net worth. Your overall goal in financial planning is to increase your net worth, so you need to know your "starting point" in order to begin mapping out a course of action.
The Second Step of Financial Planning: Identify Your Financial Objectives
The second step of financial planning is identify your financial objectives. Typically, people have two or three principal financial objectives (and that's probably enough). One common objective is to prepare for retirement financially. A second common objective is to prepare for the costs of educating children. A third common financial objective is to accumulate funds for a major purchase such a house or a business.
The Third Step of Financial Planning: Creating an Investment/Savings Plan
The third step of financial planning is calculating how much money you need to save in order to accumulate enough for achieving your financial objectives. An important input to this calculation is making a decision about where savings should be invested: mutual funds, shares of stock, bonds, and so forth.
The Fourth Step of Financial Planning: Preventing Financial Disaster
The fourth step of financial planning is protecting your wealth by attempting to insure against unbearable financial disasters: death of a family's breadwinner, a catastrophic medical expense, or an expensive lawsuit.
The Fifth Step of Financial Planning: Monitoring Progress
The fifth step of financial planning is to periodically repeat steps one through four to make sure that your net worth is increasing, that your objectives and investment/savings plans are still appropriate, and that your insurance policies are still appropriate. Obviously, if this examination identifies problems, you need to redo your financial plan.
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