Financial Planning: Definition, Steps and Importance

The phrase “financial planning is a process, not a product” implies the utmost importance for long term objectives and intelligent money management. In other words, the concept refers to the strategy that an individual or organization should follow to improve their financial wealth. Furthermore, external factors might impact financial planning, so it should be a flexible continually evolving process instead of a finished product. As a result, a financial plan is always unique and should be developed.

Depending on the types and objectives of the financial plan, the steps might vary slightly. However, the general phases of the process include the evaluation of the economic situation, identification of goals, assessment of external factors, selection of investments, and plan implementation.

The first step refers to the comprehensive appraisal of the individuals or organization’s financial capabilities and initial capital.

In personal financial planning, the assessment of external factors refers to the analysis of possible life-changing experiences, such as marriage, relocation, childbirth and other events requiring extensive capital. Thus, an intelligent financial plan should consider all the occurences that might impact the economic status. The fourth step–selections of investments–refers to the method of how the individual or organization is going to achieve its objectives. Last, its essential to evaluate the financial plan to mitigate any potential risks and mistakes and finally implement it.

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