Introduction to Financial Planning

Introduction to Financial Planning

What is financial planning? What are the benefits of creating a financial plan? Should I be using a tax accountant instead of doing my own taxes? Why haven’t I created a will yet, and what are the benefits of a trust? How is my retirement account doing, and why does it seem my investment options are limited? Should I contribute to my 401k or to my children’s 529 plan – what is the priority?

In the last few years, with the changes in estate laws, a complex tax code, 24-hour access to the internet’s financial pages, risks associated with illnesses and property, and the growing cost of education, we are saddled with more complexities and financial choices than ever before. Most people have more questions than answers to these kinds of questions.

Given the challenges stated above, making a plan may be a smart choice in actually achieving your life and financial goals. Whether you are planning to purchase a home, planning for your first child, are newly married, or hope to retire someday, financial planning is designed to integrate your needs, desires, time horizon, goals, and cash flow into a rational picture, providing peace of mind and a clear path – creating order out of chaos.

Planning helps clarify what is working and what is not working. It provides structure to your savings and budget process and may help protect you and your family in case of illness or death. Putting together an emergency fund and excess cash for a rainy day is one goal with tremendous benefit. Finally, you may gain some insight and perspective on how your choices affect your financial health, both short term and long term.


The art or business of financial planning has been around since the 1970’s in the United States and has gradually increased in popularity. As laws changed in the 1990’s to provide choices for baby boomers planning for retirement, there arose an increased need for planning; for managing cash flows; and for determining  where and how to invest retirement money, how to minimize risk, how to plan for your children’s education, and how to manage your  estate plan. Finally, the great recession of 2007-2009 increased the level of concern regarding financial stability, whether or not retirement will be possible, and how to protect your family from the many challenges in life. Financial planning has become a widely recognized, accepted, and valued practice in the United States for successfully managing these concerns.

Given life’s complexities, how did our parents generally succeed without a formal financial plan, a complex trust instrument, or detailed financial advice about one’s portfolio?  In addition to tax law and government changes, one of the most significant changes in the last thirty years has been the decline of the company pension plan or “defined benefit plan” and its replacement known as a “defined contribution plan” or 401(k) style plan. The old style pension plan, which guaranteed a certain income for life in retirement, became too high an expense for many public corporations, governments, and small business. Retiree medical costs have also steadily increased over the years. Today, firms and governments are more apt to offer plans such as 401(k), 457, and 403(b) plans and tax law changes have created the “Individual Retirement Account” (IRA).

Financial Planning Process

The financial planning process goes through several steps or stages beginning with locating a financial planning professional and defining the relationship – i.e. how you’d like to work together, what the scope is of the planning effort, and if there is a fit. Once you have selected a planner with whom  you are comfortable, the planner sets about gathering all of your personal financial data. The goal is to create a comprehensive picture of where you are today and take into account how that picture might change as you grow older. The goal is to prioritize what’s important in your life and find a sustainable path toward your goals. As an option, you might select which goals are high priorities and which are not so critical. After all, not running out of money during retirement is probably more important than going to Tahiti next year… or it may not be. Once this has been set, the planner uses sophisticated software to measure the probability of reaching these goals and what alternatives or changes might increase your chances.  Once your plan has a high probability of success, the planner should work with you to implement your plan helping you stay on this successful path. Knowing the pitfalls and changes that can occur over a year, meeting once per year to review your plan and incorporate any changes into your plan is recommended.

Finding a Planner and Determining the Cost

If your interest in planning has now been piqued, finding a planner whom you like and trust can be a challenge.  Fortunately, there are resources available.  Getting a recommendation from a friend or business colleague is one method.  Reviewing planning organizations’ web sites like NAPFA (The National Association of Personal Financial Advisors) or the FPA (Financial Planning Association) and checking on the person’s credentials is another method.  An advisor that has the CERTIFIED FINANCIAL PLANNER™ certification, a CFP® professional, can add some level of trust and credibility to the search process. Planners generally charge a fee of between one thousand to several thousands of dollars depending on the complexity and depth of the plan and whether you are single, a family, or have your own business.  Also be sure to ask if the professional is a  fee-only advisor, or is  partially or fully paid by commissions related to the products he or she recommends. Commissions on products can sometimes indicate a conflict between  what is best for the client and what is best for the advisor.

Whether you are in your 20’s and just starting your professional career and family, in your 60’s with a grown family and close to retirement, or somewhere in between, a plan can provide peace of mind and put you on the right path to get you where you want to go. “Hoping” things will work out and developing a strategy and plan to guide you are two very different things. One costs nothing, but can lead to disaster, and one costs something but can lead to a happy life.

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