Financial Planning 101: What Is Financial Planning, Exactly?

What is comprehensive financial planning, why you need it, and how it relates to your investments.

The subject of comprehensive financial planning tends to scare people away. Get ready to demystify it in the next 10 minutes!


Comprehensive financial planning has a name problem. Most people look at the label and don’t understand what it means. As a result, they assume it must not be relevant for them.

In reality, you are probably doing some bits of financial planning without using fancy words. If you have ever worked on a budget, weighed the pros and cons of different insurance plans, or set up a savings account for your children’s college fund, you were engaged in personal financial planning. Without the decisions and actions that stemmed from your review of your money situation, it would be impossible to live a financially responsible (or even a modestly predictable) life.

So far, we have established that money planning is important, and that most adults do some version of financial planning periodically. 

What exactly is “comprehensive financial planning”?

Here is the technical definition from the Certified Financial Planning Board.

The Standards of Professional Conduct define financial planning as “the process of determining whether and how an individual can meet life goals through the proper management of financial resources. Financial planning integrates the financial planning process with the financial planning subject areas.

As most technical definitions, it is a bit long and dry. Let’s break it down into smaller pieces that we can examine them one at a time.

As we discussed in the first article in this series, financial planning is, first and foremost, about understanding life goals. The next step is creating a step-by-step plan to meet those goals by properly managing financial resources.

There are many subsets of financial planning. Not everyone needs to have them all addressed at any one time, but everyone should look at them at some point over the lifetime. Here is a list of areas that our firm has helped clients with.

·         Insurance planning and risk management

·         Employee benefits planning

·         Investment planning

·         Income tax planning

·         Retirement planning

·         Estate planning

I don’t have $1M in the bank. Why do I need financial planning?

It’s a common misconception that only the wealthiest people need financial planning. In reality, people from all walks of life can improve their financial well-being by going through a financial planning process. As we mentioned earlier, not everyone needs to have this done all at once. Also, there are parts in this process that many people can handle on their own.

Here are some real-life applications of comprehensive financial planning.

•      Insurance assessment is about protecting yourself and your family in the event of a job   loss, injury, illness, death, or lawsuit.  

•      Budgeting deals with re-aligning your living expenses with your goals. Far from denying you that daily cappuccino, it’s about bringing your awareness to where your money goes so that you can decide to stop the expenditures that don’t add value (such as a $15 monthly autopayment for a piece of software you have not used in a year).  

•      Debt planning is relevant for anyone who has a mortgage, student loans, or credit card balances. While debt is an important instrument that cannot be avoided in some circumstances, it can also limit you, so it must be used wisely.

•      Having kids is a life-changing event with many expenses on the horizon. From saving for their education to paying for a wedding someday, those expenses are best approached and planned for over time.

•      Major purchases such as a home, a car, or a wedding can require an in-depth financial analysis of your options. Does it make sense to buy a home now, or would it be better to rent for another 3-5 years? What kind of a car can you get without compromising your budget? How much should you spend on your wedding so that you have the best financial start for your life together? It is not uncommon to see people make mistakes while thinking through those questions. Unfortunately, those mistakes can haunt them for years to come.

•      “Retirement planning” always sounds like it should be done for someone else, so we can use a label I heard from another financial planner: “time when work becomes optional”. What can you do today to make sure that at some point in the future, your work can become optional? From understanding Social Security to managing the unique tax opportunities that are only available in retirement, education and strategic planning can provide an advantage.  

•      Living a long life is becoming a reality for many as advances in technology, medicine and preventive care are pushing longevity to unprecedented highs. If you don’t want to outlive your assets, you need to plan for a longer life span (and a higher level of medical expenses). In that vein, longevity planning is especially important for those who want to remain independent for as long as possible, paying for their own needs and care well into their older years.

•      Care for aging parents and relatives is the other side of the longevity coin. According to the Center for Retirement Research at Boston College, the value of care provided to the elderly by family members and friends is estimated to be $500B every year. Those who take on caregiving duties invest an average of 77 hours every month in doing so, which adds up to almost 2 weeks of full-time work. A decision to step into a caregiver role has real financial consequences, and those who reflect on their options and resources in advance tend to be better prepared.

•      Passing on your wealth, whether in the form of business interests, investment accounts, trusts, or real estate, is important for everyone who will eventually die (which means everyone). You might think that “estate planning” requires you to have a mansion and a collection of antique Rolls-Royces, but that is simply not the case. No matter what your assets look like, transitioning them to the next generation with minimal tax drag will mean that your children and grandchildren will receive more of your legacy.

•      Finally, tax planning is a key part of money planning because everything you do involves taxes. Some tax consequences are easy to predict (such as paying tax on your salary). Others may be less obvious, which makes them an unpleasant surprise for the unprepared.

So, if you are going to do your own planning, above is a list of things you should be considering.

Remember that not all those items will apply to your circumstances right now. Some will be more critical and urgent than others. Perhaps you need to get your cash flows under control before you are ready to think about saving for your kids’ education. Or maybe your mom’s health is failing, and you are worried about what would happen if she were to need more help and care. It’s important to begin where you are and to focus on making progress – not on achieving an ideal point in the future where your financial planning will be “done”.

Financial Planning 101: It’s not about investments first.

It’s a common mistake to think that financial planning is all about picking the right investments. Of course, your financial plan needs to be coordinated with your investments in order for everything to work properly. However, investments are just one of the tools used to accomplish your goals.

Other tools include building good money habits, using smart timing to take advantage of privileged tax treatment of decisions, and being strategic about weighing your options. Financial planning is about identifying areas that need work, then breaking down recommendations and helping you implement them, one step at a time.

This is not a one-time project.

The true value of financial planning is in aligning what matters to you with your resources, and then taking the time to re-wire old habits and create new behaviors. That can be accomplished within a scope of a comprehensive plan, or by approaching one area of your life at a time. Once the plan is in place, you will need an automated reminder to review and re-assess it from time to time. You will also need a way to align your investment in support of your strategy – which is a big subject for another article.