The 6 Steps of Financial Planning

Learn the Best Way to Create and Implement Successful Financial Plans

Plan like the pros with these basic planning steps. Getty Images

The 6 steps of financial planning are used by the best financial planners, specifically Certified Financial Planners (TM), when creating and implementing financial plans for their clients. However, these steps can and should be followed by every investor or individual.

Why not plan for yourself like the professionals do it? Whether you do it yourself or hire an advisor, this is a crucial article for your financial education and for future reference in financial planning.

As a CFP®, I can tell you that the 6 steps of financial planning are burned into my memory, not just because I follow the process with clients and prospective clients, but also because I memorized them to take the incredibly arduous and nightmarish CFP Board Exam!

EGADIM: The 6 Steps of Financial Planning

You can recall the six steps by memorizing the acronym EGADIM, the letters that begin the first word of each step:

Establish the goal/relationship
Gather data
Analyze data
Develop a plan
Implement the plan
Monitor the plan

Step 1: Establish the Goal / Relationship

This is where the adviser will introduce him or herself and typically explains the financial planning process to a client or prospective client. The adviser may ask open-ended questions to uncover anything and everything from immediate financial goals to feelings about market risk to dreams about retiring in the Caribbean.

The purpose of establishing the goal or relationship is to form the foundation or purpose of planning itself--to begin the financial journey with the clarification of a financial destination.

Too many people save and invest money with no specific goal in mind. Going a bit deeper, too many people have financial destinations but these goals are not their own; the goals are whatever the so-called conventional wisdom has taught. The purpose of money must follow the purpose of life, not the other way around.

Do-it-yourselfers can fulfill this step by simply getting to know themselves a bit better. Financial planners do this by asking open-ended questions, which are questions that cannot be answered by a simple yes or no (closed-ended question). Here some examples of open-ended questions you can use in your own planning:

What are your feelings about investing in the stock market? Why do you think you feel that way?

What are some of your earliest memories and resulting experiences of financial planning (i.e. first savings account, first checking account, and first credit card)?

What are your financial strengths? What are your financial weaknesses?

How do you plan to save enough for retirement?

Now you have an idea of your financial goal--the guiding philosophy to direct investment objectives, cash management, insurance needs, and other financial instruments to help achieve your goals.

Step 2: Gather the Relevant Data

This step is where the information required to make recommendations for the appropriate strategies and financial products to reach your goals is gathered. For example, what is your time horizon? Do you want to accomplish this goal in 5 years, 10 years, 20 years or 30 years? What is your risk tolerance?

Are you willing to accept ​a high relative market risk to achieve your investment goals or will a conservative portfolio be a better option for you?

Also, how far along are you in your goals? Do you have any money saved yet? Do you have life insurance? Do you have a will? Do you have children? If so, what are their ages?

For example, if you are gathering data for retirement planning, you'll need to know your annual income, savings rate, years until proposed retirement, age when you are eligible to receive Social Security or a pension, how much you've saved to date, how much you will save in the future, expected rate of return and more.

Although you may already know this information, it is wise to have it all written down so you can visualize all of the necessary data required to make investment decisions--to give yourself prudent "advice."

Step 3: Analyze the Data

You've gathered the relevant data, now analyze it! Following the retirement planning example, the data you've gathered can help you arrive at some basic assumptions. Let's assume you have 30 years until retirement, you've already saved $50,000, you expect an 8.00% return on your investments, and you can save $250 per month going forward.

If you don't have a financial calculator, you can analyze the data with a financial calculator or you can go to one of many online calculators, such as Kiplinger's Retirement Savings Calculator, plug in the numbers and see if your retirement nest egg will be just right for you.

Using my financial calculator these assumptions will arrive at approximately $920,000 at the proposed retirement date of 30 years from now. Is this enough? Is your retirement goal achievable? Often,the initial assumptions are not quite enough to obtain the goal. This where you begin devising alternative solutions that are in the next step.

Step 4: Develop the Plan

Let's say you need $1 million to reach your goal. The previous assumptions (in Step 3: Analyze the Data) brought you just $100,000 short at around $900,000. If you can handle taking more market risk, you could increase your exposure to stocks in an aggressive portfolio of mutual funds and assume a 9.00% rate of return. Assuming all other assumptions remain the same, and by increasing your expected return by 1.00%, your 30-year time horizon, and savings rates would bring you to a nest egg worth nearly $1.2 million! But what if you want to keep the rate of return at 8.00% but increase your savings rate to $300 per month? You can still come close to your goal with $990,000.

You can see why this step's key word is "develop." Financial planning requires devising alternative solutions that are achievable for each individual. With so many different variables to consider, your plan needs to develop, to evolve with your needs but remain within your capabilities and risk tolerance.

Step 5: Implement the Plan

Now you simply put your plan to work! But as simple as this sounds, many people find that implementation is the most difficult step in financial planning. Although you have the plan developed, it takes discipline and desire to put it into action. Saving $250 or $300 per month may be difficult. You may begin to wonder what may happen if you fail. This is where inaction grows into procrastination. Successful investors will tell you that just getting started is the most important aspect of success. You don't need to start out at a high level of savings or at an advanced level of investment strategy. You could learn how to invest with just one fund or you could start saving a few dollars per week to build up to your first investment.

The point is to make your financial strategies achievable and to consider slowly moving up to desired savings rates rather than jumping into something that may be challenging if implemented too fast for your comfort level and budget.

Step 6: Monitor the Plan

It's called financial planning for a reason: Plans evolve and change just like life. Once the plan is created, it's essentially a piece of history. This is why the plan needs to be monitored and tweaked from time to time. Think of what can change in your life, such as marriage, ​the birth of children, career changes and more. These events all require new perspectives on life and finance. Now think of financial changes beyond your control, such as tax law changes, interest rates, inflation rates, stock market fluctuations and economic recessions. Nothing remains constant except change!

Life changes, laws change and so will your plan. But, once again, this is why it's not called financial plan, it's financial planning!

Now that you know the 6 steps of financial planning, you can apply them to any area of personal finance, including insurance planning, tax planning, cash flow (budgeting), estate planning, investing, and retirement.

Just remember to keep referring back to the steps as significant life or financial changes occur. You may also want to do as the professional financial planners do and sit down and reevaluate your plan on a periodic basis, such as once per year.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.