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5 steps to financial planning success
Define. Gather. Analyse. Develop. Implement.
We spend our lives planning; our next holiday, for a family, buying a yacht! Being able to realise our plans requires objectives, information, organisation and compromise. Successful plans will also require a significant degree of financial planning. Following a 5 step financial planning process should significantly increase the potential of developing a winning financial plan.
Step 1 - Defining and agreeing your financial objectives and goals
The goals and objectives will be the guide to the financial plan and should provide a roadmap for your financial future. They should contain the following features:
- Quantifiable and achievable
- Clear and have a defined timeframe
- Separate your needs from your wants
They should be agreed and documented with your financial adviser to assist you measure progress. They should also be reviewed periodically to capture changing circumstances and to ensure they remain relevant.
Step 2 – Gathering your financial and personal information
The financial planning process and its success will depend on the quality and clarity of the information communicated to your adviser. Your adviser will complete a detailed financial fact-find to capture all relevant information in relation to your finances. This will include:
- Income and expenditure
- Assets and liabilities
- Risk attitude, tolerance and capacity
Step 3 – Analysing your financial and personal information
Your financial adviser reviews the information provided in step 2 and uses it to produce a report that reflects your current financial profile. The following ratios are produced to improve your understanding of your financial circumstances and to pinpoint areas of strength or weakness:
- Solvency Ratio
- Savings Ratio
- Liquidity Ratio
- Debt Service Ratio
Your attitude, tolerance and capacity for risk are assessed using a psychometrically designed risk tolerance questionnaire in relation to investment assets. This is also analysed to assess your asset allocation for investment or pension goals.
Step 4 – Development and presentation of the financial plan
The financial plan is developed based on the information received in step 2 and analysis completed in step 3. Each of the goals and objectives in step 1 should be addressed and a recommendation for each identified. It will include:
- Net worth statement (a balance sheet)
- Annual consolidated tax calculation
- Annual cash flow report (displaying surplus or deficit)
The report is presented, explained, discussed and then signed by both client and adviser.
Step 5 – Implementation and review of the financial plan
Once the analysis and development of the plan is complete, the adviser will outline the recommended courses of action. This can involve implementing:
- A new pension or investment strategy
- Changing debt provider
- Additional life or serious illness insurance
- Income and expenditure adjustments
The Adviser may carry out the recommendations or serve as your coach, coordinating the process with you and other professionals such as, accountants or investment managers. They may also handle the interaction with financial product providers.
Financial planning is a dynamic on-going process that requires continuous monitoring. Review of the actions recommended in the plan should take place regularly, and the goals should be reviewed annually to take account of a change in income, asset values, business or family circumstances.
Financial Planning that follows a properly defined and documented process will give the greatest chance of a successful outcome. It will not guarantee financial security or wealth but will provide an opportunity to pursue both and requires proper analysis, discipline and expertise.