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What is Financial Planning: A Step-by-Step Guide to Getting Your Financial Life in Order

Updated on November 6, 2011

"If you don't know where you're going, any road will get you there." Lewis Carroll

What is Financial Planning?

Financial planning is the process of using financial resources and tools to meet financial goals. As the quote highlights, financial planning is figuring out where you’re going and then getting on the right road to ensure you get there. Contrary to what you may believe, financial planning isn’t just for the wealthy. Everyone can benefit from getting their finances in order.

It’s a shame that so many people go through life not knowing what financial planning is or how to plan their own finances for lasting security and wealth building. Even though it’s one of the most important lessons to learn in life, many people either learn the hard way through trial and error or they don’t learn at all. And it’s not their fault. Financial planning isn’t taught in school and many people don’t learn from their parents.

The basic financial planning process involves setting goals (figuring out where you’re going), and then determining what you need to do to reach those goals using a variety of tools. The tools of financial planning include calculating your net worth and cash flow to see where you stand, tax planning to maximize your cash flow, insurance planning to protect your assets, estate planning to ensure your heirs receive your assets without much hassle, investment planning to grow your net worth, and retirement planning to ensure that you won’t have to work until the day you die.

Setting Financial Goals

Setting financial goals is one of the most fun aspects of financial planning. In this first step you get to push your current reality aside for the time being and dream a little bit. If you're married or with a long-term partner, this (and all future) steps are best completed together. So take some time to talk together or to think about what you want for your future. Your goals will vary by your age, of course. Those who are younger may include in their goals saving enough for a downpayment on a house. Those in mid-life might be concerned with saving money for their children to attend college. Finally, those who are mid-life and older are undoubtably thinking about their retirement and when they might be able to leave their job.

Whatever your goal, it's important that it contains several important elements. The goal should be specific, measurable, attainable, relevant, and time-bound. In other words, it should be a S.M.A.R.T. goal. For more information on S.M.A.R.T. goals, please see the links above.

Let's say that one of your goals is to save for a downpayment on your first home. This goal, as stated, is vague and ill defined. In fact, the way it's written, you're unlikely to actually meet it because you really don't know where you're going specifically. That's a problem. So, why not try writing it out (and yes, I do think you should write it out) like this:

  • I/we want to save $40,000 for a downpayment on a $200,000 house in 5 years by November, 2016. In order to accomplish this, I/we need to save $667 per month.

This goal is very specific and measurable. Hopefully it's attainable and relevant to you, and it's time-bound. In reality, you'll likely have multiple goals that span several different time horizons. For example, you could have a goal regarding debt reduction, another for saving for a home, one for building your emergency fund and yet another for retirement. It's important to write down S.M.A.R.T. goals for each instance. Only by getting very clear on what you want, will you ever get to where you need to go.

Now you're ready to see where you stand today on your path to reaching your goals.

Financial Planning: Where Are You Today?

In your quest to answer the question, what is financial planning, the next step is perhaps the most important. After goal setting, the financial planning process requires that you assess where you are today with your finances. After all, if you don't know where you are now, it will be very difficult, if not impossible, to figure out what you need to do to reach those goals you just set. There are two very important tools you should use as you work to get your financial life in order and figure out where your finances stand today. These are the Net Worth Statement and the Cash Flow Statement. Please, don't be intimidated by these finance terms. They're very simple concepts to grasp and even easier to use. Let's start with the Net Worth Statement.

The Net Worth Statement is a measure of how much wealth you've accumulated over your entire lifetime. Starting with your assets, you'll need to use the worksheet below to record everything you own that holds value, in other words, your assets. You'll then record everything you owe, your liabilties. Your net worth is calculated by subtracting your liabilities from your assets. This number may turn out to be negative, which is not uncommon, especially if you're young. Try not to worry too much at this point what the number is. The important thing is to know that you now have a starting point for moving forward. If your goal is to increase your net worth, you now know where you stand today and what you need to do to reach your net worth goal. For example, if there's a lot of debt on your Net Worth Statement, debt reduction may become a goal for you.

I'd like to make two very important points here. Please, do not skip this step! Also, don't estimate the numbers! Go to your files and pull the exact numbers. Call your bank if you need to. Access your retirement account and savings account. If you don't have an organized system for storing this information, please take the time to set one up. A very good source for setting up a financial filing system is David Bach's book, "Smart Women Finish Rich." At any rate, this step needs to be completed in full and accurately. Take the time to do it right and you won't be sorry.

The net worth statement should be updated regularly so that you can see what progress you're making.

Net Worth Statement Worksheet

Cash in checking accnt:
Cash in savings accnt:
Home Equity Loan:
Cash in hand:
Other Real Estate Loan:
Money market accnt:
Auto Loan:
Market Value of home:
Credit Card Balances:
Student Loans:
Deliquent Taxes:
Market Value of Investment Property:
401k Loans:
Est. Value of household items:
Personal Loans:
Market Value of vehicle(s):
Life Ins. Loans:
Mutual Funds:
Other Loans:
Cash Value Life Ins.
Market Value of Boats, RV's etc:
Total Assets:
Total Liabilities:
Net Worth = Assets - Liabilities:

Financial Planning: Where Are You Today? - Part 2

Now that you have your Net Worth Statement completed, it's time to finish your assessment of your current financial situation by determining your cash flow. This is another extremely important step in the process of meeting your financial goals so again, please don't skip this! And again, please don't estimate!

Cash flow is simply an analysis of how much money you make less how much money you spend. After you finish your Cash Flow Statement you'll understand how much money you have at the end of the month to apply to your important financial goals.

Have you ever wondered where your money goes? Does it seem that you run out of money before you run out of the month? If so, the Cash Flow Analysis will help immensely. There's only one way to approach this. You must track your expenses and income meticulously for at least one month but it's preferable that you increase that to several months and that you repeat it periodically.

There are many ways to track your income and expenses. One of the most basic is to simply get a small notebook and carry it with you everywhere. Every time you spend money, write it in the book along with the category the expense falls into, such as groceries or gasoline. Every time you receive money, whether it's finding a quarter on the street or receiving your paycheck, record it in the notebook. There are also ways to take advantage of technology to make this process easier. If you have an iPhone or iTouch, you can download a budgeting application, such as AceBudget, to help. Or, use, a free, highly rated, Internet financial planning tool. By the way, also has an app so you can take it on the go.

When you've tracked your income and expenses for a full month, create sub-totals for each category and then overall for income and expenses. Now, subtract the expenses from your income. Hopefully, this number is positive and if it is, congratulations! You're living within your means. If it's not positive, it means that you have a cash flow problem. In other words, you're spending more than you earn and you need to fix this or you'll never reach your financial goals. I know this sounds harsh but it's true. The most important way to reach your financial goals and build wealth is to live below your means.

If you find yourself with a negative cash flow you need to sit down and take a hard look at where you're spending your money and at how much money you earn. Are there categories of spending that you can cut back on? Is there any way you can earn more money? Don't give up! You can do it with some shrewd money saving moves and perhaps by doing something on the side to make a bit more money.

Using the Financial Planning Tools to Reach Your Goals

Now that you know where your finances stand, let's take a little time to talk about the other financial planning tools to help you meet your financial goals.

  • Tax planning: For many wage earners, taxes will be your largest annual expenditure. It makes sense to learn how to reduce your tax burden and then take action. The two most common ways to reduce your taxes are to purchase real estate and to invest in an IRA or 401k. With real estate, the owner can deduct from their income the interest and taxes paid, lowering your taxable income. The only watch-out here is to make sure you can actually afford the house. Don't make the mistake some people do and purchase a more expensive house than they can afford simply to get a larger tax write-off. Investing in an IRA or 401k are also great ways to reduce your taxable income. Contributions for most tax payers directly reduce their taxable income so try to maximize these contributions. Also, it makes sense to have your taxes done by a professional or at the very least, use one of the tax preparation software programs so that you don't leave anything on the table.
  • Estate planning: This is probably the most overlooked tool in the financial planning process. For many, thinking about death is something to be avoided but it pays to think about it ahead of time. Just imagine your loved ones navigating the potential red tape to get access to the assets you intended them to have and perhaps paying legal fees to get through the process. Instead, you should have a will and perhaps also a trust, which will enable your loved ones to avoid the lengthy and expensive probate process. Finally, make sure that you've named your beneficiaries on all retirement and life insurance plans.
  • Insurance planning: Insurance is all about protecting your assets. Without it, all of your hard work and planning could be for naught if you suffer a loss from a fire or disability. If you're young and don' t have much in the way of assets, the most important insurance for you will be disability insurance to protect yourself from future income loss due to disability. Obviously, if you own a home and automobile, you'll need home owners and car insurance. Finally, if you have children, life insurance is necessary. Don't go overboard on the life insurance though. Figure out how much money your children and spouse will need should you pass away and get a policy in that amount. Don't forget that they'll get Social Security survivor benefits as well.
  • Investment planning: You'll need to figure out what to do with the extra money you have at the end of the month. There are many investment options from the most conservative savings or money market account to stocks, bonds, and mutual funds. Where you put your money should depend upon the goal you have for it. It's wise to put your money into "buckets" depending on the goal and time frame. For example, if you're saving for a down payment on a house that you expect to need in the next few years, you should put your money in a conservative investment. On the other hand, money ear marked for long term goals like retirement can be placed in a more risky investment such as stocks and mutual funds.
  • Retirement planning: Retirement planning is essential for everyone and should be started at a young age. The earlier you start saving, the less you'll need to save each year. Saving for retirement is a huge topic and much has been written about it. I'd recommend reading a book like the one in the link above to help plan this important aspect of your future.

How to Take Action on Your Financial Goals

Your goal of answering the question, what is financial planning, is nearly complete! You now have very specific financial goals and you know where you stand today and have an understanding of financial planning tools. Now, you can take action on meeting your goals. So, where do you start?

It's important not to get overwhelmed by this process. Start with your cash flow. How much money do you have at the end of each month to apply to your goals? Next, distribute that money across your goal buckets in a way that will allow you to meet your goals. If you don't feel like you have enough money to meet all of your goals, you'll need to work on your cash flow a little more. It may involve making some big changes in your life like changing where you live or the car you drive or the job you have. Once you get to a number you can work with, go back again to figure out how much money to put into each bucket.

After that, you'll be in charge of monitoring your situation. Twice a year, take the time to evaluate how you're tracking against your goals and then make any necessary adjustments to stay on track. Visualize your success, follow your plan, evaluate your progress, and celebrate because if you follow this plan, you'll meet your goals!


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    • Crystal Tatum profile image

      Crystal Tatum 

      5 years ago from Georgia

      I will be coming back to this one as this is a very important goal for me. You are an excellent writer, very thorough. Voting up and sharing.

    • SD Dickens profile imageAUTHOR

      SD Dickens 

      6 years ago

      Thanks Monica! I think we all have things we can improve upon in our financial life LOL

    • monicamelendez profile image


      6 years ago from Salt Lake City

      Nice guide! I have a lot of things that I can improve on.

    • profile image


      6 years ago

      More people should read this hub the details are great on it. I personally budget everything, and works out leaves me with enough money to travel go out whenever I want without a 9-5 job.

    • thinghopper profile image


      7 years ago from Lake Tahoe

      I found this hub to be very thorough, thank you!

    • SD Dickens profile imageAUTHOR

      SD Dickens 

      7 years ago

      Thank you Millionaire Tips...I appreciate the vote up and kind words!

    • Millionaire Tips profile image

      Shasta Matova 

      7 years ago from USA

      This is very useful - a great overview, and details. Voted up.

    • SD Dickens profile imageAUTHOR

      SD Dickens 

      7 years ago

      I'm glad you enjoyed it icciev...thanks!

    • icciev profile image


      7 years ago from Kuwait

      very interesting and useful article, thanks for sharing and voted up.

    • SD Dickens profile imageAUTHOR

      SD Dickens 

      7 years ago

      Thanks Kellymom1970!

    • kellymom1970 profile image


      7 years ago

      SD Dickens, What great hub,It's like I'm starting over now that my husband is gone. this was a nice wat to get my mind back on track. Thanks


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