The 7 Steps of Financial Planning

Learn How to Plan Your Finances Like the Pros

the steps for successful financial planning

The Balance / Julie Bang

Certified Financial Planners (CFPs) follow seven financial planning steps to create recommendations for their clients. These steps are considered to be the practice standards for CFPs. They should be followed to comply with the Certified Financial Planner Board of Standards' Code of Ethics and Standards of Conduct if the planner and client agree the standards are part of the scope of engagement between them.

These steps could also be learned and applied by individuals for their own benefit if they wanted to act as their own nonprofessional financial planner.

What Are the 7 Steps of Financial Planning?

The seven steps of financial planning start with getting to know the client's current financial situation and goals and end with continually measuring performance toward those goals and updating them as necessary.

  1. Understanding the client's personal and financial circumstances.
  2. Identifying and selecting goals.
  3. Analyzing the client's current course of action and potential alternative course(s) of action.
  4. Developing the financial planning recommendation(s).
  5. Presenting the financial planning recommendation(s).
  6. Implementing the financial planning recommendation(s).
  7. Monitoring progress and updating.

The CFPB defines financial planning as "a collaborative process that helps maximize a Client’s potential for meeting life goals through Financial Advice that integrates relevant elements of the Client’s personal and financial circumstances."

Step 1: Understanding the Client's Personal and Financial Circumstances

The CFP begins their financial planning process by asking their clients questions designed to help them get a clear picture of who the client is and what they want. Some of the questions are qualitative and lead to a better understanding of the client's health, family relationships, values, earnings potential, risk tolerance, goals, needs, priorities, and current financial plan.

Some of the questions are quantitative and lead to a better understanding of the client's income, expenses, cash flow, savings, assets, liabilities, liquidity, taxes, employee and government benefits, insurance coverage, and estate plans.

The advisor may ask open-ended questions to uncover necessary information to start the plan. This information may include a range of topics, from financial goals to feelings about market risk to dreams about retiring in the Caribbean.

The advisor will also analyze the client's financial information to ensure they have a clear understanding of where their client stands.

For example, if you are working on retirement planning, some of the key information needed is 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, and the expected rate of return on your investments.

Step 2: Identifying and Selecting Goals

The advisor will use their financial expertise to help their client select goals. They'll ask clarifying questions to help identify those goals. For example, what is your time horizon? Do you want to accomplish this goal in five 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?

Together, the financial planner and client will prioritize which goals are most important.

Step 3: Analyzing the Client's Current Course of Action

Next, the advisor will analyze the client's current course of action to see if it's moving them toward their financial goals. If it's not, the advisor will identify alternative courses of action and let the client know the advantages and disadvantages of each option.

Step 4: Developing the Financial Planning Recommendation(s)

The financial planner selects one or more recommendations that they believe will help meet the client's goals. They evaluate each recommendation, considering:

  • What assumptions were made to develop the recommendation
  • How the recommendation meets the client's goals
  • How it integrates with other aspects of the client's financial plans
  • How high a priority the recommendation is
  • Whether the recommendation is independent or needs to be implemented with other recommendations

Step 5: Presenting the Financial Planning Recommendations

In this step, the financial planner presents the recommendations and the thought process behind the recommendations. This helps the client make an informed decision about whether the recommendations are a good fit.

Step 6: Implementing the Financial Planning Recommendation(s)

Implementing the plan means putting the 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. You may begin to wonder what may happen if you fail. This is where inaction can grow into procrastination.

If the financial planner has implementation responsibilities, you'll also clarify what those are so you know exactly what steps your CFP is taking on your behalf.

Successful investors will tell you that just getting started is the most important aspect of success. You don't need to start at a high level of savings or 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.

Step 7: Monitoring Progress and Updating

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 life events may require new perspectives or changes to your financial plans. Now think about events or changes beyond your control, such as tax laws, interest rates, inflation, stock market fluctuations, and economic recessions.

Your CFP will work with you to ensure your plan is meeting your goals, and if it's not, they'll recommend changes.

The Bottom Line

Now that you know the seven 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. While you can do it yourself, professionals can provide invaluable advice and a neutral perspective on your finances.

Whether you do it yourself or hire an advisor, remember to keep referring back to the steps as significant life or financial changes occur. You may also want to do what professional financial planners do and sit down and reevaluate your plan periodically, such as once per year.