The Financial Planning Process

THE FINANCIAL PLANNING PROCESS
Most people want to handle their finances so that they get full satisfaction from
each available dollar. Typical financial goals include such things as a new car, a
larger home, advanced career training, extended travel, and self-sufficiency
during working and retirement years.
To achieve these and other goals, people need to identify and set priorities.
Financial and personal satisfaction are the result of an organized process that is
commonly referred to as personal money management or personal financial
planning.
Personal financial planning is the process of managing your money to achieve

personal economic satisfaction. This planning process allows you to control your
financial situation. Every person, family, or household has a unique financial
position, and any financial activity therefore must also be carefully planned to
meet specific needs and goals.
A comprehensive financial plan can enhance the quality of your life and increase
your satisfaction by reducing uncertainty about your future needs and resources.
The specific advantages of personal financial planning include
Increased effectiveness in obtaining, using, and protecting your financial

resources throughout your lifetime.
Increased control of your financial affairs by avoiding excessive debt, bankruptcy,

and dependence on others for economic security.
Improved personal relationships resulting from well-planned and effectively

communicated financial decisions.
A sense of freedom from financial worries obtained by looking to the future,

anticipating expenses, and achieving your personal economic goals.
We all make hundreds of decisions each day. Most of these decisions are quite
simple and have few consequences. Some are complex and have long-term
effects on our personal and financial situations. The financial planning process is a
logical, six-step procedure:
(1) determining your current financial situation
(2) developing financial goals
(3) identifying alternative courses of action
(4) evaluating alternatives
(5) creating and implementing a financial action plan, and
(6) reevaluating and revising the plan.
Step 1: Determine Your Current Financial Situation
In this first step of the financial planning process, you will determine your current
financial situation with regard to income, savings, living expenses, and debts.
Preparing a list of current asset and debt balances and amounts spent for various
items gives you a foundation for financial planning activities.
Step 2: Develop Financial Goals
You should periodically analyze your financial values and goals. This involves
identifying how you feel about money and why you feel that way. The purpose of
this analysis is to differentiate your needs from your wants.
Specific financial goals are vital to financial planning. Others can suggest financial
goals for you; however, you must decide which goals to pursue. Your financial
goals can range from spending all of your current income to developing an
extensive savings and investment program for your future financial security.
Step 3: Identify Alternative Courses of Action
Developing alternatives is crucial for making good decisions. Although many

factors will influence the available alternatives, possible courses of action usually
fall into these categories:
Continue the same course of action.
Expand the current situation.
Change the current situation.
Take a new course of action.
Not all of these categories will apply to every decision situation; however, they do
represent possible courses of action.
Creativity in decision making is vital to effective choices. Considering all of the

possible alternatives will help you make more effective and satisfying decisions.
Step 4: Evaluate Alternatives
You need to evaluate possible courses of action, taking into consideration your
life situation, personal values, and current economic conditions.
Consequences of Choices. Every decision closes off alternatives. For example, a

decision to invest in stock may mean you cannot take a vacation. A decision to go
to school full time may mean you cannot work full time. Opportunity cost is what
you give up by making a choice. This cost, commonly referred to as the trade-off
of a decision, cannot always be measured in dollars.
Decision making will be an ongoing part of your personal and financial situation.
Thus, you will need to consider the lost opportunities that will result from your
decisions.
Evaluating Risk
Uncertainty is a part of every decision. Selecting a college major and choosing a

career field involve risk. What if you don’t like working in this field or cannot
obtain employment in it?
Other decisions involve a very low degree of risk, such as putting money in a
savings account or purchasing items that cost only a few dollars. Your chances of
losing something of great value are low in these situations.
In many financial decisions, identifying and evaluating risk is difficult. The best
way to consider risk is to gather information based on your experience and the
experiences of others and to use financial planning information sources.
Financial Planning Information Sources
Relevant information is required at each stage of the decision-making process.

Changing personal, social, and economic conditions will require that you
continually supplement and update your knowledge.
Step 5: Create and Implement a Financial Action Plan
In this step of the financial planning process, you develop an action plan. This
requires choosing ways to achieve your goals. As you achieve your immediate or
short-term goals, the goals next in priority will come into focus.
To implement your financial action plan, you may need assistance from others.
For example, you may use the services of an insurance agent to purchase
property insurance or the services of an investment broker to purchase stocks,
bonds, or mutual funds.
Step 6: Reevaluate and Revise Your Plan
Financial planning is a dynamic process that does not end when you take a
particular action. You need to regularly assess your financial decisions. Changing
personal, social, and economic factors may require more frequent assessments.
When life events affect your financial needs, this financial planning process will
provide a vehicle for adapting to those changes. Regularly reviewing this decision-
making process will help you make priority adjustments that will bring your
financial goals and activities in line with your current life situation.
Budgeting
A budget is an outline of expectations for what a company wants to achieve for a

particular period, usually one year. Characteristics of budgeting include:
Estimates of revenues and expenses
Expected cash flows
Expected debt reduction
A budget is compared to actual results to calculate the variances between the two
figures.
Budgeting represents a company's financial position, cash flow and goals. A

company's budget is usually re-evaluated periodically, usually once per fiscal year,
depending on how management wants to update the information. Budgeting
creates a baseline to compare actual results to determine how the results vary
from the expected performance.
While most budgets are created for an entire year, that is not a hard-and-fast
rule. For some companies, management may need to be flexible and allow the
budget to be adjusted throughout the year as business conditions change.
Financial Forecasting
Financial forecasting estimates a company's future financial outcomes by

examining historical data. Financial forecasting allows management teams to
anticipate results based on previous financial data. Characteristics of financial
forecasting include:
Used to determine how companies should allocate their budgets for a future
period. Unlike budgeting, financial forecasting does not analyze the variance
between financial forecasts and actual performance.
Regularly updated, perhaps monthly or quarterly, when there is a change in

operations, inventory, and business plan.
May be both short-term and long-term. For example, a company might have
quarterly forecasts for revenue. If a customer is lost to the competition, revenue
forecasts might need to be updated.
A management team can use financial forecasting and take immediate action
based on the forecasted data.
Financial forecasting can help a management team make adjustments to

production and inventory levels. Additionally, a long-term forecast might help a
company's management team develop its business plan.

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THE FINANCIAL PLANNING PROCESS

Personal financial planning is the process of managing your money to achieve

Increased effectiveness in obtaining, using, and protecting your financial

Increased control of your financial affairs by avoiding excessive debt, bankruptcy,

Improved personal relationships resulting from well-planned and effectively

A sense of freedom from financial worries obtained by looking to the future,

(1) determining your current financial situation

(2) developing financial goals

(3) identifying alternative courses of action

(4) evaluating alternatives

(5) creating and implementing a financial action plan, and

(6) reevaluating and revising the plan.

Step 1: Determine Your Current Financial Situation

Step 2: Develop Financial Goals

Step 3: Identify Alternative Courses of Action

Developing alternatives is crucial for making good decisions. Although many

Expand the current situation.

Change the current situation.

Take a new course of action.

Creativity in decision making is vital to effective choices. Considering all of the

Step 4: Evaluate Alternatives

Consequences of Choices. Every decision closes off alternatives. For example, a

Uncertainty is a part of every decision. Selecting a college major and choosing a

Financial Planning Information Sources

Relevant information is required at each stage of the decision-making process.

Step 5: Create and Implement a Financial Action Plan

Step 6: Reevaluate and Revise Your Plan

A budget is an outline of expectations for what a company wants to achieve for a

Estimates of revenues and expenses

Expected cash flows

Expected debt reduction

Budgeting represents a company's financial position, cash flow and goals. A

Financial forecasting estimates a company's future financial outcomes by

Regularly updated, perhaps monthly or quarterly, when there is a change in

Financial forecasting can help a management team make adjustments to

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