The first step of financial planning

Financial planning is a comprehensive process that involves every aspect of your financial life. Make sure you're starting with this step.

Financial planning is a comprehensive process that involves every aspect of your financial life. At Planned, we break the financial planning process down into 10 separate categories that should be covered - net worth, income, expenses, savings, debt, credit score, investments, insurance, retirement, and estate.

Define your ideal life

But before you even start getting into your financial data and the numbers, the first step you must take is to define what your ideal life would look like. This involves asking yourself questions such as, “Where do I want to live? What do I want to do for a living? How much do I want to work? How do I want to spend my time?” Financial planning is impossible if you don’t know what you’re working towards.

The goal is to be as detailed as possible with your answers to these questions. The more details you can add, the easier it’ll be to create a plan of how to get there.

These questions should go beyond your finances. You need to figure out what your core values are and what the purpose of money is for you. These values will be your true motivation going forward and will help you define what you’re working for.

It’s crucial to start with this step to make sure your financial plan is helping you achieve the life you actually want. When most people think about financial planning, they often think that it’s all about optimizing your finances and growing your wealth as much as possible. But many times, that’s not what people truly want. Money is a means to an end, not the end itself.

For many of us, our dream is to work less and spend more time with our families. Or we want the freedom to be able to travel more and experience the world. Or maybe our dream is to start our own business. Many of us would also love to focus more on giving back to others through philanthropy and volunteering.

All of these things involve money, but the way to reach each of these goals isn’t about becoming as wealthy as possible.

Write everything down

Another important part of this step is to write everything down. It’s been shown that writing things down can significantly improve the likelihood of reaching your goals. Having something to reference will help you stay motivated and remind yourself what you’re working for.

It’s also important to write everything down because financial planning isn’t a one-time action - it’s an ongoing process. Life is bound to change, and sometimes your goals and values will too. You want to make sure you’re still working towards the things you truly want.

Create specific goals

Once you’ve defined your ideal life, the next step is to create specific goals to achieve each aspect of your ideal life.

Setting goals is something many of us do. It’s helpful to set goals to think about where you want to be and what you want to achieve in your life. The problem is most of us don’t ever end up reaching the goals we set. This is something we’ve all been through, and it’s often because we’re not setting our goals properly. If we learn to set our goals properly, it becomes much easier to reach them.

When it comes to setting effective goals, one of the most important things is to make each goal as specific as possible. If your goals aren’t specific, there’s no way to measure if you’re on track to reach them.
An example of a bad goal would be “I want to lose weight”. This goal has no specifics, so how would you know if you achieved your goal? How much weight do you want to lose? What’s your time frame on when you want to lose it?

A much better goal would be “I want to lose 10 pounds by December 31st”. This goal is much clearer because it has a specific amount and timeline. With this goal, you’ll be able to clearly determine if you’ve reached your goal or not.

Start small

When it comes to setting goals, we often dream a little too big. If your goals are too ambitious at the start, you’re setting yourself up for failure. You want to start out by setting goals that are relatively easy to achieve. This will allow you to gain momentum and boost your confidence to help you reach bigger goals in the future.

Starting with smaller goals will also give you a better idea of what you’re capable of. When you first start setting goals, it’s a complete guessing game. You probably won’t have a clue what a good goal for you might be.

If you set smaller goals, you might end up reaching them earlier than you expected. Or you might end up taking longer than you expected. Either way, it’s okay. You’ll now have a better understanding of your capabilities and you’ll be able to set more effective goals going forward.

Avoid Parkinson’s law

One thing to watch out for is falling trap to Parkinson’s Law. Parkinson’s Law is the concept that your work expands to fill the time you have available to complete it. You’ve probably experienced this when you had a homework assignment in school. No matter how long you had to complete the homework assignment, you’d wait until the last minute to get it done.

It’s important to keep this in mind when you set goals. Don’t give yourself too much time to reach each goal. Otherwise, you’ll likely wait until the last minute to work on it. This isn’t an exact science, but you’ll improve as time goes on.

Parkinson’s Law can actually be used to your advantage, though. By shortening the timeline you give yourself to complete goals, you’ll often find a way to reach your goals sooner than you expected. We tend to underestimate ourselves and how quickly we can get things done when we’re focused.

Make adjustments as needed

Once you’ve set goals, you’ll likely need to make some adjustments as things change. Life tends to throw us curveballs that can cause us to alter our plans. You might even need to make adjustments because your goal was a little too ambitious in the first place. This is all part of the process.

Although adjustments are often necessary, try not to make them too frequently. The main purpose of setting goals is to help determine exactly what you need to do to achieve them by the desired timeline you set. If you’re constantly changing that, it makes it difficult to figure out what you need to do to reach your goals.

Defining your ideal life is one of the most important steps in the financial planning process. Your ideal life will often change over time, so make sure you’re reviewing your goals continuously and adjusting as needed.