What Is the First Step in Financial Planning?

Financial planning is essential for achieving one’s financial goals. It is a step-by-step approach wherein you create a financial plan to control your income, expenses, and investments to better manage your finances. However, not everyone has a financial plan. According to reports, many workers live on the paycheck to paycheck model, and nearly half of the adult population does not have sufficient funds to cover an unexpected expense of $1,000. Despite such numbers, most Americans do not undertake strict financial planning to secure their present and future. To this point, 75% manage their finances and do not take any help from a professional financial advisor, as reported by a recent survey. According to the survey, only 17% of people seek help from a financial advisor. While financial planning does not necessarily need professional help, having expert financial guidance can prove beneficial in improving your well-being. The crux is to have a comprehensive financial plan that can support your short-term and long-term goals. With debt and living expenses rising steeply in the country, the value of setting the right financial goals and adhering to a well-crafted financial plan is indisputable. If you wish to create a financial plan that can help you attain your short-term and long-term goals and financial needs, consult with a professional financial advisor who can guide you on the same.

Most people in America are coming short of their financial plans and targets. According to a recent report, four in ten workers with a retirement saving goal said the amount was a guess and not based on any planning or estimation of current expenses, inflation, etc. Another report stated that most workers are short of meeting their retirement savings goals. The report advises people to save at least 10-17% of their income if they plan to retire at 65. This is double what most people in America are currently saving for their retirement.

These statistics highlight the need for a foolproof financial plan and the importance of following the right steps in financial planning for a secure present and future. Despite understanding this pivotal aspect, many people are confused about what their first step in financial planning should be. The first step is to understand your current financial status and follow up. 

Here are the most critical steps in financial planning that you can follow to ensure your financial well-being:

1. Understand your current financial status: 

Often, people overlook their current financial situation and can create financial plans that are unachievable as a result. This, in turn, discourages them, and hence, they tend to ditch their strategy. Even if looking at your current finances makes you anxious, it is critical to ensure you create a realistic financial plan. Addressing your financial concerns is an effective medium to gain monetary control and progress towards your financial future. To comprehensively understand your current financial situation, you can deduce vital elements, such as your monthly income, pending liabilities and debts, bank account balances, monthly expense sheet, investments, and other asset holdings. When you unearth these factors, you can precisely understand how much you are earning, spending on necessary and unnecessary items, saving, and redirecting towards your financial goals. You can also ascertain areas where you are overspending and reduce your outlay to save more. Your bank account balances and investment holdings also give you a fair idea about your current financial net worth, which can prove beneficial when setting your future financial targets. For instance, if you are planning for retirement, you would require information like your annual income, savings rate, years until retirement, the eligible age for Social Security benefits, savings till date, expected future savings, and the potential return on your investments.

2. Create realistic financial goals: 

The second step in personal financial planning is determining your financial goals. Setting targets is an essential component of a financial plan. Your financial goal could be to save for your higher education, buy a home, sponsor your child’s education, build a retirement corpus, create an emergency fund, etc. Understanding what you want for your future can help you understand your financial priorities. However, it is important to set financial goals that are realistic and measurable. You can create SMART (Specific, Measurable, Attainable, Realistic, and Time-bound) goals. Whether you are aspiring for short-term wins or looking to set your long-term personal financial roadmap, you can improve your chances of success by creating SMART goals. Make your goals specific so they can be measured. In addition to this, motivate yourself with attainable, action-oriented, and realistic targets. Also, stay focused and try to create time-bound goals. For instance, instead of wanting to pay off your debt or saving money for the future, you can aim to set crystal clear targets, such as aiming to pay off $6,000 in credit card bills in two months or saving $4,000 each month, etc. Shaping broad-stroke hopes into a formal plan can help set your goals in motion.

3. Create a budget: 

Once you know your current financial situation and have prioritized your goals, the next financial planning process step involves creating a budget to bridge the gap between where you are and where you want to be. A budget will help you navigate towards your goals by supporting you to live within your means. You can classify your non-discretionary expenses (like rent, utility bills, transportation, mortgage payment, etc.) and discretionary expenses (like entertainment, dining out, online subscription, and more). The objective is to reduce discretionary expenditure and redirect the excess funds towards savings and investments. The budget can also help you increase your residual income by allowing you to increase your monthly income (through part-time jobs, promotions, self-employment, etc.). Create a zero-based budget, where each dollar you spend has a definite purpose with the ultimate objective to optimize spending. Understanding your full financial picture (addressing your financial status, knowing your financial goals, and creating a budget) can allow you to plan for your future efficiently.

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4. Manage your debt: 

Debt is complicated and can cause monetary stress. Your financial plan can help you constructively pay off your debt. If you pay off your debt, especially high-interest loans, you can achieve your financial targets effectively. When you focus on spending less and saving more, you have more disposable income at your end. You can use the excess funds to pay off your credit card bills, fast-pay mortgage payments, and more. Alternatively, you could consider taking a low-interest debt to consolidate your high-interest loan.

5. Set aside an emergency reserve: 

Creating an emergency reserve is one of the critical financial planning process steps. An emergency reserve is a lump sum you set aside to financially support you in an unexpected future contingency, such as a health crisis, sudden salary cut, loss of job, early retirement, and more. As per financial experts, your emergency reserve should consist of at least 12 to 24 months of your current living expenses. This is an indicative figure, and the actual amount of your emergency reserve depends on your financial situation, risk appetite, life stage, health condition, etc. If you want to know the precise amount of your emergency reserve, you can ask a professional financial advisor.

6. Manage your investments: 

The next step in strategic financial planning is managing your investments. A sound investment portfolio is essential for your funds to grow and achieve your goals. The objective is to create a portfolio that aligns with your risk tolerance and investment horizon to maximize your portfolio and support wealth accumulation. Your financial plan will involve finding the right investment options that help you earn your desired returns while being in sync with your risk tolerance and investment period. For instance, if you are young and have 15 to 20 years to retire, your investment choices can include more growth stocks, alternate assets, etc., to generate high returns, but these investments also carry risks. However, if you are closer to retirement, you could choose low-risk stocks, fixed-income investments, like debt-related securities, index bonds, cash, and cash equivalents, etc., to preserve capital. Your financial plan can involve monitoring, managing, and rebalancing your portfolio to enhance returns over time and ensure your portfolio aligns with your risk appetite, life stage, and financial goals.

7. Deploy tax-saving strategies: 

Taxes are painful and often consume a large share of your income. It is possible to minimize taxes by adopting the right strategies. You can use a failsafe financial plan to reduce your tax burden. Common proficient tax-saving strategies include saving in tax-advantaged retirement accounts, deploying capital gain offsetting strategies, making charitable donations, giving lifetime gifts, creating a living trust, using tax-loss harvesting tactics, and more. These strategies can help you avert your tax burden effectively. You can also engage with a financial advisor to build a solid tax-saving financial plan that is the foundation of a financially secure future.

8. Draft a comprehensive estate plan: 

One of the most neglected but critical steps in financial planning is drafting an all-inclusive estate plan. Estate planning is not only for the rich. Anyone who owns an asset can have an estate plan. Foolproof estate planning can ensure your long-term financial security and fulfillment of your wishes. Your estate planning can involve accounting for your assets, including your bank balance, retirement account balances, shareholdings, real estate holdings, and more. Once you create a list of your assets, you can get a fair estimation of their value and decide how to distribute them amongst your beneficiaries. Your estate plan can also involve drafting a will, creating a living trust, streamlining foreign investments, and so on.

Moreover, an estate plan can assist you in reducing your estate taxes and effectively passing them on to your beneficiaries, as you desire. Your estate plan can also support you while you are alive. You can direct how your estate funds are used in case of your mental or physical incapacitation. If you have minor kids or children that require specific attention, your estate plan can involve assigning trustees and guardians who can take care of your children in case of your absence.

Now that you know the steps in financial planning, you can apply these steps and create a holistic personal financial plan. While you can create a financial plan yourself, it is beneficial to contact a professional financial advisor to get invaluable, expert advice and a neutral perspective on your financial situation.

When to seek professional financial advice

If financial planning stresses or overwhelms you or you do not have the expertise to create an all-inclusive financial plan, you can consult a professional financial advisor. An expert can offer the much-required insight into the financial world, enabling you to better understand your finances, determine your goals, create a zero-based budget, pay off debt, create an adequate emergency reserve, wisely manage your investments, use effective tax-saving strategies, and draft an all-encompassing estate plan, and more. Hiring a professional can help you ensure you take a holistic view of your finances, eliminate emotional bias, follow rules and regulations, and more. A professional financial advisor will also support in getting the right insurance plan for your needs or securing a lifetime care facility.

Overall, hiring a financial advisor is a wise decision for your future financial assurance. Engaging with a financial advisor is an investment for your future instead of an expense. Further, financial advisors justify their charges by allowing you to improve your investment returns. According to a recent study, the services of a professional financial advisor can likely improve average investment returns by 3% each year. This additional return on investment is also known as the ‘The Advisor’s Alpha’.

In comparison to the improvement in returns, the fee of a financial advisor is only 1% of your Assets under Management (AUM) or lower. When you compare the absolute value of these returns with the fee you pay for a financial advisor, you can conclude that hiring a financial advisor has higher monetary benefits. Moreover, engaging with an expert advisor helps you reduce your anxiety and stress related to money matters, retirement planning, estate distribution, taxes, etc.

How to find the right professional financial advisor

To find the right financial advisor for your needs, you can use these steps:

1. Determine your requirements, including areas you need expert guidance, such as retirement planning, tax planning, debt management, estate planning, budget creation, and so on.
2. Ask your friends and family to suggest the names of some financial advisors. However, do not hire someone only because your friend or family member is associated with the same person. Your financial situation is unique. Hence, choose a financial advisor that matches your requirements.
3. Use the WiserAdvisor’s advisor match tool to search for a competent financial advisor for your needs.
4. Assess the candidate based on their certifications, qualifications, areas of expertise, licenses, certifications, discipline records, fee structure, fiduciary policy, and more.
5. Interview the shortlisted candidates to gain an in-depth understanding of their client support offerings, communication structure, team support, and more.
6. Select a capable financial advisor from among your shortlisted candidates that best match your financial needs.

To summarize

Creating an all-encompassing and evolving financial plan is the key to achieving financial stability. Taking help from a professional financial advisor can enable you to create a flawless and focused financial plan to fulfill your current and future financial requirements.

Use the free advisor match service to get in touch with a professional who can help create a suitable financial plan for you that meets your financial goals. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your financial needs and goals.

For additional information on retirement planning strategies that can be tailored to your specific financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.