What is financial planning?

Here’s the definition of financial planning, as expressed in the CFP Board’s updated Code and Standards published in October 2019:

“Financial Planning is a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances.“

Do the words “collaborative”, “maximize”, and “life goals”stand out to you? That’s what financial planning is all about.

What financial planning is NOT about is gaining permission to spend money. Nor is it something only wealthy people do.

These are unfortunate misunderstandings of what financial planning is and who it benefits. Those working to build wealth, as well as those who are already higher net worth can benefit from sound financial planning.

When approached correctly, financial planning is comprehensive, professional wealth management.

Another misconception is what type of advisors are financial planners. Job titles and professional designations in the financial industry are quite confusing. Yet, there is an important distinction between investment-only advice and financial planning.

Financial planning is the hub of comprehensive wealth management

What is financial planning?

There are seven key areas of planning we place our focus; at a high level, they are:

1. Net worth. This is your personal balance sheet of assets and liabilities. See how your wealth evolves as you buy and sell and/or use assets and liabilities.
2. Cash flow. A snapshot of money in and money out over a period of time. Here we can plan the timing of income, expenses, savings, and investing.
3. Risk planning. Also known as insurance or protection planning. Your total risk exposure is identified in areas such as: home and auto, life, disability, health, long-term care, and general liability. For business owners, we’ll review risks from business activities and professional errors/omissions.
4. Investment planning. We establish your investment strategy, your personal risk number, investment time frame, and liquidity needs. Your investment strategy is built to integrate with your financial planning objectives.
5. Tax planning. Review potential tax strategies based on current and future projected income, deductions, investments, asset disposition, and cash movements.
6. Retirement planning. Define what retirement means to you. How do you envision your purpose and identity once you are no longer working for a living? How much do you expect to spend on a monthly basis in retirement? How much do you need to save before retiring? At what age you plan to retire? When should you take Social Security benefits?
7. Estate planning. Decide and document how you would like to protect and pass on your financial legacy. Who are the people and/or organizations you’d like to benefit? Get everything in place to avoid probate and disputes to protect your assets and those you love.

Financial planning is really about understanding your values, your financial purpose, and what you want for yourself. Clarity around what’s most important to you brings empowerment in your financial choices.