How to Start Financial Planning in 8 Steps

Financial planning is an excellent way to build your wealth. Proper coaching from a financial advisor can promote behavior that helps you build your wealth and maximize your retirement assets. That’s important, because today’s breakneck speed of life leaves precious little time to incorporate all the information you need to expertly manage your wealth. Even with the support of the latest technology, financial planning can be a full-time job for someone not familiar with the industry. How to start financial planning can be overwhelming, but with the help of a financial advisor, you can learn the habits that help you grow and protect your wealth. 

To start the financial planning process, consider the following steps:

1. Take stock of your finances.

Planning relies on accurate information. That starts with an accounting of what you own and what you owe – your assets and liabilities. 

Assets include your personal property and investments, including retirement accounts, CDs, savings accounts, cash-value life insurance policies, annuities and brokerage accounts. It also includes alternative investments, like gold and real estate. 

Liabilities include mortgages, vehicle financing, personal loans and credit card debt. 

Your net wealth is your assets minus your liabilities. A positive number is good news, but a negative number may spell big trouble and should be corrected. 


Leave the guess work out of your financial planning and talk with a financial advisor. Schedule a complimentary conversation with Financial Freedom to see if we’re a good fit for your needs. 


2. Create a budget.

Your financial plan should include money you put aside for future expenses, like a wedding, children’s education and retirement. A budget tells you how much you can save and invest each month. It should list all your monthly income and expenses, and can be an excellent way to review your spending. You might be surprised how much you waste each month on purchases you don’t really need. 

A better idea is to pay yourself first – budget your savings and investment contributions, and then live on the remainder. The amount is less important than developing the discipline to live within your budget.


3. Educate yourself.

A key feature of your financial plan is your investment plan. Investing requires an understanding of the potential risks and rewards of investing in different types of assets. Stocks, bonds, real estate, futures and indexes all have characteristic trade-offs of risk and return. If you aren’t familiar with how these investments work, education is readily available online, but make sure you’re reading information from a reputable source.  

The best way to learn about investments may be to work with a financial advisor. This is a specially trained and accredited professional who can give you valuable advice on your investments and other aspects of your financial life.


4. Gauge your attitude toward risk.

Education is important, but so is your attitude toward risk. If you are highly risk-averse, you’ll probably be uncomfortable owning more risky investments like stocks. On the other hand, if you welcome risk, you can use techniques like margin accounts and derivative investing to increase your potential returns (and potential losses). Your financial advisor can help you find where you lie on the risk continuum. 

Knowing your risk appetite is crucial to investing, but you need to make sure it’s also appropriate for your age. Younger investors, for example, may want to take advantage of time to invest in riskier securities. Folks near or in retirement, on the other hand, may need to be more cautious. Your financial advisor can advise you on the age-appropriate stance toward risk, given your unique circumstances.


5. Open short- and long-term accounts.

A retirement typically includes several income streams. For example, you may want to consider an Individual Retirement Account for your Golden Years, and a 529 account to help finance your children’s education. If available, people also often enroll in their company’s 401(k) retirement plan and contribute some of their pre-tax income each paycheck. You can also establish short-term savings accounts for items like an emergency fund and upcoming life events, like a marriage or a new child. 

Apply your knowledge and your advisor’s guidance to select which investments make the most sense for your situation. Or turn the decisions over to your advisor altogether, but only after you perform due diligence and verify that he or she is trustworthy.


6. Work out your insurance plan.

Your financial health can be greatly affected by your physical and emotional health, and insurance can help here. You will have to select the best health insurance to fit you and your family’s needs. Life insurance can help guarantee your family’s finances if something happens to you, but it’s important to fully understand the trade-offs of permanent and term life insurance. 

Disability insurance is important to protect your income in case of short or long term disability.  Once again, look to your financial advisor for guidance. Other insurance needs might include policies for your home, your vehicles and your long-term care.


7. Establish your estate plans. 

I believe that all folks should establish a will – it’s not just for the rich. A will is a critical component of your estate plan; it articulates your wishes for beneficiaries and also importantly names a guardian for minor children. As your wealth grows, you can set up trusts and other mechanisms to fund your beneficiaries and save on current taxes. You may have seen ads for do-it-yourself wills, but they might be risky and subject to challenge. It’s usually safer to have a professional draw up a will that conforms to your state’s regulations. Also, it's important to have a living will, health care power of attorney and potentially a general durable power of attorney.  Lastly, be sure to name beneficiaries for your retirement accounts, life insurance and other beneficiary eligible accounts.


8. Develop a tax plan.

Taxation is an important part of your financial life. Your goal is to pay all the tax you legally owe and not a penny more. Using tax-advantage accounts like a 401(k) and IRA lets you deduct your contributions and not pay taxes until you withdraw money later on. 

For your non-sheltered investments, there are ways to reduce or eliminate taxes. These include tax-exempt municipal bonds, index exchange traded funds and end-of-year tax selling. Charitable giving can also reduce your taxable income, as can mortgage interest. Speak with your financial advisor or certified public accountant to explore the many ways you can reduce your tax burden.


Using a Financial Advisor

You can create your financial plan on your own, but be careful you don’t miss any crucial steps. It is your nest egg that you want protected, after all. Financial Freedom can help you develop the tools you need to increase and protect your wealth. Contact us for an initial discussion about your current financial situation. With the right coaching, you can master your destiny from a position of strength, so let’s talk and start the journey.

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Filed Under: Comprehensive Financial Planning