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How financial planning works

The financial planning process is not set in stone, but most planners use a fairly uniform process. As described by the Certified Financial Planner Board of Standards, it uses the following six steps:

1. Establishing and defining the client-planner relationship

The process begins with the financial planner explaining the services that he or she will provide. These services are normally written down in a document. The responsibilities of both parties are also included, as are how you will pay for the services.

Both of you will agree on the extent of the relationship and how you will make decisions. The scope of the engagement between both of you can be changed by mutual agreement.

2. Gathering data, including your goals

The planner will gather information (data) from you about your financial situation in order to start crafting a plan. This data normally includes income, expenses, employment benefits, insurance coverage, your investments, your tax situation, your retirement plans, your risk tolerance, your time horizons, any estate plans, any anticipated lifestyle changes, your health, and any other financial resources (such as patents).

With this information, the planner can, in the next stage ahead, construct a story about your financial position; this will include defining your goals in a number of personal and financial areas, such as retirement, cash flow, and investing. This will guide him or her in creating the financial plan you will follow to help fulfill those goals.

Georgina Gracia-Leacock,  tax preparer and office manager, looks on as Orren Hercules gets out documents to prepare his taxes. (Photo: Drew Angerer/Getty Images)
Georgina Gracia-Leacock, tax preparer and office manager, looks on as Orren Hercules gets out documents to prepare his taxes. (Photo: Drew Angerer/Getty Images)

3. Analyzing and evaluating your financial status

The financial planner will analyze your data to determine what you must do to help meet the goals that you have set down. Your assets and liabilities, your spending, investments, taxes, insurance, and other relevant information will be studied.

Financial statements such as a statement of financial position will be drawn up so that you can see your financial status on paper. From these, you can also get a sense of what your future income, insurance, and other needs will be, and what strategies would make sense for you to adopt.

4. Developing and presenting financial planning recommendations

Your planner will present some recommendations to help achieve your goals, based on the data you provided. He or she will explain each one and answer any questions or concerns that you pose. Here is where your risk tolerance will come into play, because you will need to look at investments that can provide the money you need to meet your goals.

Your planner will discuss investment choices with you and help you choose investments based on your financial needs, goals, risk tolerance, and time frames.

5. Implementing the planned recommendations

In this step, your planner and you agree on how to carry out the actions you agreed on. The planner may work with an investment advisor or stockbroker to help you begin investing.

In some cases, the planner will do this work for you; in other cases, he or she will act as a coordinator. Which manner he or she acts in is usually determined by credentials and job title.

6. Monitoring the financial plan

You and your planner must monitor and review the plan periodically. Goals and timeframes will change, strategies will need revising, and targets will shift. The performance of the investments in the plan will need to be reviewed to make sure they are on track.

You will meet with your planner to review the plan and make any needed changes to it. Your financial plan will be a living document that may last a long time, possibly even for a while after your death.

Even if you do not use the services of a professional planner, these steps can guide your personal planning.

Dive deeper: What is financial planning? Here are the basics

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

Read more information and tips in our Planning section

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