The Financial Planning Process is a dynamic process
that requires regular monitoring and reevaluation. Generally
it has five steps: 1) assessing your situation; 2) setting
goals; 3) crafting a plan; 4) taking action; and 5) monitoring
1) Assessing your financial situation is usually done
by compiling several lists. These lists are simplified versions
of corporate balance sheets and income statements. On your
personal balance sheet, you list all your assets (eg.: car,
house, clothes, stocks, bank account) and give their values.
You also list all your liabilities (eg.: credit card debt,
bank loan, mortgage) and give their values. Subtracting your
total liabilities from your total assets will indicate your
personal net worth. To understand how your personal net worth
will change in the future, you compile what is called a personal
cash flow statement. This lists your income, and your expenses.
By subtracting your expenses from your income, you obtain
your net cash flow for the period. If your net cash flow is
positive, your personal net worth will increase. Most people
grossly underestimate how much they spend each year.
2) Setting goals gives your life a financial direction.
Examples of financial goals are: To retire at age 50
with a personal net worth of $800,000", or To buy
a house in 3 years paying a monthly mortgage servicing cost
that is no more than 25% of my gross income. It is not
uncommon to have several goals, some short term, and some
3) The financial plan details how you will accomplish
your goals. It could include for example, reducing unnecessary
expenses, increasing your employment income, or investing
in pork belly futures. However you plan to do it, detailed
calculations have to be made for each period (usually yearly).
The effects of taxation and inflation must be considered.
4) When you have decided on the best plan for your
goals and circumstances, you implement it. This involves taking
specific actions. It often requires discipline and perseverance.
Many people obtain assistance from professionals such as accountants,
financial planners, investment advisors, and lawyers.
5) As time passes, it is important to monitor your progress.
If it looks like you will not obtain your goal, you can either
alter your plan or adjust your goal.