Q:

Finances 101: What is financial planning?

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Quick Answer

Financial planning is the process of identifying goals, objectives and dreams that require a financial investment, and then developing a plan to achieve those goals financially. To create an accurate financial picture for a person's future, financial planning considers the person's current state of finances and makes predictions for his or her future financial state, which is determined based on several known variables. A person's present net worth, asset allocation, tax liabilities, retirement plans and estate plans all play a role in developing a future financial plan. These variables help predict future cash flows, withdrawal plans and asset values. Collectively, people use these variables and future asset growth estimates to determine if their future financial goals are currently viable and, if not, what steps they must take to get their finances in order.

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Developing a Financial Plan
Some individuals undertake financial planning alone, but others enlist the help of a financial planner. A financial planner is a licensed professional who helps an individual make the most of his or her financial resources. A financial planner evaluates a person's current financial health by looking at factors like income, liabilities, taxes, insurance, investments and an estate plan, if there is one, notes Investopedia. To formulate a client's custom financial plan, financial planners consider future goals, upcoming expenses and impending wealth transfer plans. Financial planners then evaluate their clients' financial strengths and weaknesses to ensure they meet their future goals. Based on the client's current financial state and future plans, financial planners can recommend changes to meet those end goals. Financial planners can also identify any changes and alterations that clients must make to hit their target financial plans in the future, such as adjusting asset allocation by increasing or decreasing expenses.

Financial Planning for Specific Events
In addition to using a financial planner for general financial planning, people can also hire a financial planner for certain events that necessitate financial advising. These situations include personal life changes like saving money for retirement, making financial adjustments for a wedding or a divorce, planning for a baby or adopted child and caring for an elderly parent or sick family member. People might also hire a financial planner to prepare for a child's education or to ensure a smooth transition as they sell or transfer ownership of a family business. Financial planners can also advise clients in the wake of an unexpected event that has financial consequences, such as the loss of a job, a natural disaster or expenses associated with a serious illness.

Selecting a Financial Planner
When choosing a financial planner, people should look for certain qualities and qualifications, according to the Financial Planning Association of Massachusetts (FPA MA). Ideally, a financial planner can help clients formulate a complete financial picture rather than focusing only on one or two components, such as insurance and taxes. People should also check a financial planner's credentials before hiring him or her, according to the FPA MA. The reason for this is that financial planning is not regulated at the state or federal levels of government. Instead, individuals obtain licenses through independent organizations. A qualified financial planner will hold a license from the Certified Financial Planner Board of Standards, Inc. (CFP Board). The CFP Board holds licensed planners accountable for their actions under an ethics code.

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