There are different steps in financial planning which can facilitate the process and increase the success rate of the resulting plan. These steps can be used to construct a plan for both long-term and short-term plans. The six steps can be expressed by the acronym EGADIM:
Establish financial goal(s)
Gather data
Analyze the data
Dedvelop a plan
Implement the plan
Monitor the plan
Establish Financial Goal(s)
This goal can be both for the long-term and the short-term. In this step, one would consider different savings and investing goals. Some common goals include paying off credit card debt or student loan debt, saving for an emergency fund, saving for a downpayment for housing, and building a stock investment portfolio. In this step, one may consider future changes to their personal situations that will affect their financial outlook. For example, marriage, the birth of a newborn, or health change of family members. When these life changes happen, it is advisable for one to revisit these goals to consider whether they are still relevant to their needs.
If one is working with a CFP, this will be a step to establishing a working relationship with the CFP. This can include getting to know what is the communication style of the CFP and whether they have the experience working with investment tools the client is interested in or whether the CFP has the experience with advising clients in similar life circ*mstances.
Gather data
These data will be used to inform the development of a plan, therefore it will be beneficial to look at the present situation and track record of preferably 90 days or more. Looking at a longer-term trend will be more accurate than a shorter-term trend. In this step, one can gather past bills and statements. If there are foreseeable life changes happening, one should also look into ways to expect how the changes may affect their financial situations. For example, if a couple is expecting a newborn child, they can consider gathering data on the cost of daycare or the education needs of the baby. One should also consider their experience in personal finance and their risk tolerance, which will be useful to guide future decision makings.
Analyze data
This step includes looking into data that is collected and considering how different investing or saving strategies can facilitate one to reach their goal. When analyzing, one should also take into consideration of fluctuations that may happen to both income and expenses. For example, people without a stable job preferably should give more consideration to months with lower income instead of basing their plan on the more optimistic number. In this step, one should take into account their goals and how they can achieve them. For example, if one is planning to retire at 50 years old, they may consider using retirement saving calculators or other tools to determine how much they have to save or invest to achieve their goal.
Developing a financial plan
In this step, one will look into different ways they can achieve their goals. This step includes looking into different investment tools, rate of return, and associated risk. One should take into consideration of their risk tolerance and how they can save and invest in this step so that the resulting plan will have a higher chance of success. During the planning, one should also take into account that while projections can be informative, there are still fluctuations in the market and they should also consider alternative plans to tackle different situations. There are many available options in the market, one should take time in developing and looking into alternatives that best suit them.
Implementing the plan
Implementing the plan is often the most difficult step in the personal financial planning process. It takes discipline to take action on the plan on a daily basis while developing a plan may only take a few hours. It is important to start with a plan even when one may not be able to carry it out flawlessly.
Monitor the plan
Life circ*mstances and the external environment can change, often those are hard to predict and uncontrollable, such as inflation, market fluctuation, and changes in tax rates. It is important to revise and develop a new plan as needed. The existing plan and how it is carried out should be revisited so that the new plan can take into account how the old one is working. Personal finance planning is a process that will continue as life goes on.
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A simple example of a financial plan can be as follows. Tom is aiming to clear his $1000 credit card debt. After taking into consideration of his income and necessary expenses, he discovered that he has been spending $100 per month eating out, and sometimes, he will use his credit card without giving it much thought, which makes it difficult to save his money. Therefore he may decide to cut his spending on eating to half the first month, then cut it into half again in the next month for him to get used to his new lifestyle. The money he saved will be used to pay off the credit card he owed the smallest amount on and he will work his way to the next bill once the smallest is repaid. As Tom carries out his plan, he may decide that he can buy groceries in another supermarket which will save him an extra $50 a month, which he can speed up paying off his debt.
In this example, Tom takes into account that lifestyle changes can take time to accommodate, therefore his plan has a higher chance of success. As he carries out his plan, he revisits it when he is able to make changes to it, which allows the plan to remain relevant to his lifestyle and his goal.
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Personal finance planning is a process for one to gain an understanding of their financial situation and make plans to achieve their goals in the future. A Certified Financial Planner (CFP) has a professional designation that indicates the person has mastered the subject area and can provide guidance and advice on one's financial planning. There are six steps in personal finance planning: EGADIM: Establish financial goal; Gather data; Analyze data; Develop a plan; Implement the plan; Monitor the plan. Establishing the goal is the first step. If one engages a Certified Financial Planner (CFP), one will want to establish the boundaries of a professional relationship with him or her and determine whether this CFP is a fit. The next step is to gether data that includes one's experience in financial planning, income, expenses, etc. Analyzing and evaluating the client's needs is where the CFP conducts an assessment and prepares recommendations to help one achieve their financial goals. When developing a financial plan, it is important to look into different ways one can achieve their goals. Implementation of a plan is often the hardest while the most important step in the process, it is important to start the plan and it is normal to make adjustments. A financial plan should be monitored periodically or when there are changes to one's life circ*mstances.
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Personal Financial Planning
Without financial planning, reaching financial goals is difficult if not impossible. Let's say you're planning to drive from New York City to Los Angeles, what path would you take? How long would it take you? Where would you stop along the way and why? Just like navigating the best route for a road trip, personal money management requires an organized plan.
Different factors influence a person's goals and decisions. While some individuals desire a new car or home, others want to travel, maintain good credit, plan for retirement or simply save.
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Financial Planning Steps
Regardless of each person or family's goals, there is a six-step procedure to help plan, prepare and execute short- and long-term financial plans. These steps are known by the acronym EGADIM, which stands for the following:
Establish the goal
Gather data
Analyze data
Develop a plan
Implement a plan
Monitor the plan
1. Establish Financial Goals
What things do you want or need? What things are necessary for your immediate short-term plan, and what are your goals for longer term savings and investments?
This step can be revisited as your personal situation changes. Marriage, divorce, the birth of a child or death of a family member, a major career change or healthcare needs are all factors that could affect your financial goals. Review this step on a periodic basis just as you would check the map at different points throughout your trip.
2. Gather Relevant Data
What is your time frame for reaching your goals? Months, Years? How much risk are you willing to take on? How far along are you? Many different factors will affect your financial planning decisions and priorities. Personal life situation - marital status, household size, employment, retirement goals, health factors - and personal values will be a driving force behind many financial decisions and priorities.
To build the foundation of a solid financial plan, take an honest and detailed assessment to determine your current financial situation. Understand current income, debt, monthly living expenses, savings or any other financial aspect of your present situation.
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3. Analyze the Data
At this point, you know your current situation and financial goals, so you'll need to analyze the data collected. Consider your trip from New York City to Los Angeles, there are many routes you could take to get there. One may be a shorter, more direct route, one may have more sights to see along the way, and one may be a longer but smoother road. Identifying alternative routes or, in the case of personal financial planning, alternative courses of actions will allow you to make a more informed decision.
Let's consider you have ten years until your child will head off to college. You must determine the amount you would need to start saving now in order to meet your goal. There are online calculators that will help you perform what-if analysis and model different scenarios to help better analyze the data.
Many individuals choose to hire a Certified Financial Planner (CFP) to perform this analysis and prepare an assessment with recommendations. A Certified Financial Planner is an individual who has met specific education, experience and ethics requirements to earn a professional certificate. They can support you through this six-step process.
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4. Develop your Financial Plan
No matter how small or large the decision, a financial action plan must be developed and implemented to make your plan a reality. What are your priorities? What steps will you take to achieve your goals? How long will it take? This action plan can be equated to the map you'd use on your cross-country trip. It provides guidance and tells you where to go next and how long it will take to get there.
Evaluating each of your alternatives with consideration for the analysis you performed will help you further develop your plan. When choosing between two alternatives one choice must be given up in exchange for a second choice, also known as an opportunity cost.
Consider an individual who has $10,000 to spend. The person can choose an exotic vacation or start investing for retirement. Many factors will play into the decision-making process, such as age, future earnings potential, and urgency for retirement savings.
Making sound decisions, however, involves risk management. Most decisions you make will involve some degree of uncertainty. Educating yourself as much as possible about all alternatives will help you determine the potential impact and consequences of your decisions. Taking all factors into consideration is the best approach to making a sensible decision in support of your financial goals.
5. Implement Your Financial Plan
Simply mapping your route to Los Angeles will not get your car there. You have to get in the car and drive. Along those lines, even the best written financial plan won't work without action and dedication. How fast you get there is up to you, but remember that moving too fast is not always best. Be sure you maintain a steady pace, and keep your eyes on your overall destination.
6. Monitor Your Plan
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The final step involves regularly assessing your current financial situation so you can adjust your action plan to ensure you stay focused on your goals and objectives. Consider you're en route to Los Angeles and find the road is closed. If you take a detour, you're forced to revise your path for some time period. As things change in your personal life, your financial plan must also be revised.
Lesson Summary
The financial planning process requires effort and dedication to prioritize and set goals. Determining your options and creating and implementing a personal action plan for yourself and/or your family is critical for success. This is something that you can do on your own or with a financial advisor; however, understanding your current financial situation and where you want to go will help guide your path to success.
Using the acronym EGADIM will help you remember the six steps of financial planning:
Establish the goal/relationship
Gather data
Analyze data
Develop a plan
Implement the plan
Monitor the plan
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