Creating a financial plan is something that can’t be done randomly. There are too many moving parts that need to be considered in a organized manner in order for a financial plan to be effective. There needs to be a financial planning framework in place that allows you to systematically work through all the components of a financial plan in a way that speaks to who you are, addresses your current situation and positions you for success both now and in the long term.
There is no one way of doing financial planning. Everyone is different in how they go about creating a financial plan. But, whether you do your own planning or work with a financial planner, there is a generally accepted financial planning process that contains the key elements of what financial planning is. This process is defined by the CFP Board which is the professional, non-profit, organization that grants the CFP® certification. The CFP® certification is generally accepted as the recognized standard of excellence for competent and ethical personal financial planning. All CFP® professionals must adhere to a Standards of Professional Conduct when it comes to financial planning. Since I am a CFP ® professional I am obligated follow these standards. Here’s the definition and the the 6 steps of the financial planning process:
The Standards of Professional Conduct (Standards) define financial planning as “the process of determining whether and how an individual can meet life goals through the proper management of financial resources. Financial planning integrates the financial planning process with the financial planning subject areas.”
There are six steps to the financial planning process:
- Establishing and defining the client-planner relationship
- Gathering client data including goals
- Analyzing and evaluating the client’s current financial status
- Developing and presenting recommendations and/or alternatives
- Implementing the recommendations
- Monitoring the recommendations
As you can see, the process is fairly direct. It starts with defining the client-planner relationship and ends with monitoring the plan. In between is all the analysis and work that is part of building the plan. The steps seem cut and dried without much room for variation. There is actually a lot of variation when it comes to building a plan. The variation comes in how each person addresses each step of the process and to what detail they address each step.
Financial planning is part science and part art. While financial planning obviously involves a lot of numbers and other items that can be seen as either “yes” or “no” there’s also a lot of “it depends”. The “it depends” part comes from the fact that each and every one of us is unique. That uniqueness is expressed in how we live our lives, our behaviors, and our values. Because of that uniqueness I believe financial planning can’t just be reduced to a series of numbers.
The 6-step process above only lists the steps (the science), not the many ways people integrate those steps into their unique approach to financial planning (the art). That’s where the individual financial planning philosophy or framework comes into play. That framework influences how the financial plan is ultimately built and implemented.
A couple of weeks ago I wrote about the need for “true financial planning”. What is “true” financial planning? Well, there’s no official definition of true financial planning, it’s just my way of expressing what I believe financial planning should be. Basically, true financial planning places the emphasis on the individual, not the numbers. True financial planning has 4 key components. I call those components and the way that I combine them with the 6-step process the Clear Wealth Method. It builds on the 6 step financial planning process by adding my life focused, behavior-based planning philosophy.
The Clear Wealth Method is the financial planning framework I use with clients. Here are the the four components along with a description of what generally occurs in each component. Each situation is unique so the framework is designed to be flexible and adaptable.
You need to determine who you truly are when it comes to money and what you want your money to do for you in your life. This knowledge will be used to begin building a vision of what it is that you ultimately want to achieve over your life. This component typically includes:
To build a workable financial plan you need to take the time to honestly and completely assess where you are currently, with all the opportunities and challenges that come with living in the world today. This component includes:
Once you have built a vision of who you want to become and combined it with the reality of your current situation you are ready to start re-imagining your life, implementing your plan and beginning the move toward your ideal life. This component includes:
The final step is to continually reassess and evaluate your situation and make sure that you are doing everything possible to keep on the path that you have set for yourself. If your situation changes you need to be able to adjust your plan to meet your new reality. This component includes:
Whether you act as your own financial planner or you use a professional such as myself, make sure you “work the framework”. Financial planning is a participation sport…you need to be involved in the process. Don’t fall into the trap of believing that all you need to do is gather up all your financial information, drop it off at your financial advisor’s office or enter into an online calculator and….BAM!!…you have a true financial plan. You will have what technically could be called a financial plan but it will most likely be much, much less than it could be.
The preferred alternative is to build a plan within a framework that takes your individual history, needs, goals, and dreams into account. If you do that, you will have a financial plan that is in tune with who you are now and will be much more effective at helping you live your life by design instead of by default.
If you have any questions about your own situation, or would like an independent second opinion on anything in your financial life, you can set a time for a no obligation call to discuss things further. If my services might be a match for your needs I’ll let you know. If not, I’ll let you know that as well.
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