What is Financial Planning?

So, what exactly is financial planning?

This might seem like a silly question, but lots of people probably don’t really understand what Financial Planning actually is. So let’s explore.

Firstly, let’s have a look at planning. I looked up two different dictionaries, both web based of course these days, and let’s have a look at what they say.

Google’s default definition of Planning is
“the process of making plans for something” and they follow with a definition of plan as:

“decide and make arrangements in advance”.

The freedictionary.com defines planning as:
“an act of formulating a program for a definite course of action”,

So both involve working out actions to take to achieve some outcomes in the future. Now if we add the Financial bit in, that would mean working out what actions to take to achieve some financial outcomes.

Which reinforces my belief that “real” financial planning is outcomes based. That is, it formulates a plan to achieve some specific financial outcome(s).

It should then be ends based (the outcome) not means based (financial products).

Let’s look at a simple example. Take someone who asks “I have $100,000 to invest, what’s a good investment.”

I believe it would be foolish to answer that question without first establishing two important details.

Firstly, what are the outcomes you are trying to achieve, and secondly, what does the rest of your financial world look like right now.

Without knowing these two things the conversation could be an endless conversation talking about a whole variety of investments (the means to the end) without any understanding of how it might fit that person’s total world.

For example, someone who was going to use the $100,000 as a deposit on a house in 6 months, should be limiting their investments to low risk term deposits or high yield cash accounts unless they deliberately wanted to speculate.

However, someone who wanted to use the $100,000 as the basis of a 20-year retirement plan could consider a much different range of options with a much longer timeframe.

Real Financial Planning promotes a full and frank discussion of how you are positioned right now as well as drilling down into exactly what outcomes you are trying to achieve. There should be a significant amount of discovery to understand the people, passions and possibilities that are important to you and this process should lead to the establishment of clear goals that motivate you to take action towards your desired outcomes.

The simple way I explain financial planning to my clients is as follows.
Financial Planning is simply planning ahead to:
• Make sure you make smart decisions about money,
• Achieve your financial goals,
• Assess where you are now,
• Plan where you want to be,
• List the strategies and actions to get you there,
• Review to ensure you stay on track

The financial planning process should always start with goals. The plans developed to achieve the goals should focus on the strategies first and then the actions that need to be taken to implement the strategies.

You will note that so far there is no talk of financial products, such as managed funds, insurances, shares etc. Financial products are the means to the ends and while they are extremely important they come after the goals and the strategies have been developed and are merely actions that implement the strategies.

Good Financial planning starts with outcomes required (the ends), comes up with the strategies, and then the actions. The strategies and actions are the means to the end.

You should avoid any process or adviser that leads with the means (the financial products) and lean towards one that starts with one of three places:

1. Where are you right now.
2. What do you want to achieve.
3. Who and what is most important to you.

A professional thorough process that starts with these three key points will always be a great place to start the next phase of your financial journey.

WARNING : All of the information in these posts are provided for general purposes only. That means they do not take into account your specific circumstances. They are designed to improve your knowledge in all areas of your financial world. Before you act on any information in these posts, you should get good advice that is specific to your own circumstances and goals. If you would like help in any of these areas, please free to contact us for a free 15 minute phone consultation to determine if we can help you.

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