Financial planning is about taking control of your money and preparing for the future. It helps you set goals, manage your resources, and make smart decisions about saving and spending.
You’ll learn what a financial plan is, how it works, and why you need it for your personal and professional life.
Financial Planning Definition
Financial planning is the process of organizing your money to meet your goals. It involves looking at your income, expenses, savings, and investments to create a clear plan. The goal is to make the most of your money while preparing for the future.
It helps you decide where you want to go and how to get there. You might want to:
- save for a vacation
- pay off debt
- save for education
- build a retirement fund
- save for a house downpayment
What Is a Financial Plan?
A financial plan is a detailed guide for managing your money.
Think of it as a personalized strategy for reaching your financial goals. Your plan might include setting a monthly budget, building an emergency fund, or investing for retirement. It breaks big goals into smaller, manageable steps for you to follow.
What Is the Purpose of a Financial Plan?
A financial plan helps you organize your money to reach your goals. The purpose of a financial plan is to give you a clear picture of where you stand and what steps to take next. It keeps you focused and on track.
What's Included in a Financial Plan?
A financial plan typically includes the following components:
- Financial goals and objectives, such as saving for a home, retirement, or education expenses.
- Net worth statement—a snapshot of your current financial position, detailing savings, investments) and debts.
- Cash flow analysis of your income and expenses to understand spending habits and identify areas for improvement.
- Budget for how you will divide your income towards expenses, savings, and debt repayment.
- Debt management plan to handle and reduce debts, like prioritizing high-interest obligations.
- Investment strategy to grow your wealth through investment vehicles, aligned with your risk tolerance and goals.
- Insurance planning to maintain necessary coverage to protect against unforeseen events, such as health issues or property loss.
- Tax planning to cut tax liabilities.
- Retirement planning for financial security, including estimating required savings and choosing retirement accounts.
- Estate planning to manage and distribute assets after death according to your wishes.
What is Personal Financial Planning?
Personal financial planning focuses on managing your money to meet your individual needs. It’s about creating a plan that fits your goals, lifestyle, and priorities. W
This type of planning covers several areas. It includes:
- budgeting
- saving
- investing
- planning for taxes
It also involves preparing for unexpected events with insurance and an emergency fund. A good personal financial plan adapts as your life changes like divorce, children, remarriage, property purchases or sales, etc.
What Are the 5 Steps of Financial Planning?
If you’re looking to create your own financial plan, follow these five steps:
- Assess your current financial situation. To do this, you need to gather your financial documents about your assets and debts. What is your current income like (include all forms of income, including passive) and don’t underestimate your expenditure.
- Outline your short and long-term financial goals. Think critically about your retirement and how much you’ll need. Be clear with these goals.
- Create a strategic plan for now and the future. This budget should help you improve on areas where you can cut back on expenses and still live comfortably.
- Develop and investment and savings plan. Know where you want to be in the future will help you divert funds to the appropriate investment vehicles and saving accounts. You should also have an emergency fund.
- Implement and review your plans. Now that you’ve planned, you should act. Also, remember to review it regularly. Life changes quickly and unexpectedly.
What Is Financial Planning and Analysis (FP&A)?
Financial Planning and Analysis (FP&A) is about helping businesses make smart financial decisions.
This area of corporate finance involves:
- planning and budgeting
- integrated financial planning
- management and performance reporting
- forecasting and modeling
The goal of financial planning and analysis is to keep a company’s finances on track while planning for growth.
Your FP&A team of professionals study data to understand how a business is performing. They look at things like sales, expenses, and profits. Then, they use this information to help businesses decide what to do next and how to improve their bottom line.
Fee Structures for Financial Planning
With a better understanding of financial planning, you should know how planners get paid.
These are the typical fee structures:
- fee-only financial planning
- commission-based financial planning
- fee-based financial planning
What is Fee-Only Financial Planning?
With fee-only financial planning, you pay a flat fee, an hourly rate, or a percentage of the money they manage for you. They don’t earn commissions from selling products. A fee-only financial planning model is transparent and avoids conflicts of interest.
A fee-only certified financial planner focuses on meeting your financial goals—not on selling investments. In this case, you are working with planners with a fiduciary duty to you.
What Is Commission-Based Financial Planning?
Commission-based financial planners make money by selling financial products like insurance or mutual funds. While you don’t pay upfront for advice, it’s difficult to know if their interests truly align with yours. Since they make money from the products they sell, you are trusting your finances to a salesperson—not an objective party.
However, they must follow the “suitability rule” when advocating for products. This only means they can only sell products they believe will benefit clients—which is subjective. There is no legal duty to clients, so they don’t have to disclose conflicts of interests like a fiduciary.
What Is Fee-Based Financial Planning?
Many get confused when they hear “fee-based” because they think it means fee-only financial planning. Fee-based financial planning combines fee-only financial planning and commission-based models. They charge a fee for their advice and earn commissions from by selling products.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
