Financial Planning: A Six-Step Approach
STEP 1: The first step is to gather the necessary data to ensure a thorough understanding of your situation. This becomes the basis for the creation of a financial model, which is used to evaluate your current financial situation. It will show your current asset allocation, your net worth, the direction and rate of its change, your cash flow, income and estate tax liability, and other items. Also, we will review your wills, trusts, life and disability insurance, and any other legal arrangements you have created.
STEP 2: Step two is to develop your personal financial objectives. Frequently, our clients say, "It's to make sure that I have a source of income that I can't outlive, and secondarily, to leave a legacy for my family, and perhaps the community." Often, however, it's more complex, and involves thinking about things that you have never considered, prompted by questions that perhaps you have never been asked.
STEP 3: Step three consists of identifying problems that are present in your current planning. This is basically a process of reconciling the likely outcome based upon your current arrangements with your desired outcome as described in your objectives. It is in this third step that the full benefit of the planning process becomes apparent. Issues that you never thought of, problems that you never realized existed, will be identified—simply because your financial picture was never so completely developed, and your objectives never so clearly and completely stated.
STEP 4: This step entails the development of recommendations—specific strategies for implementation. Equipped with the pros and cons of each, and an economic model to determine their impact, you will be in the best position to determine which is right for you. The agreed-upon strategies will be reduced to writing in a comprehensive report.
STEP 5: The fifth step is implementation. This is where your other advisors will be most instrumental. You will have a game plan, a specific course of action to take to your attorney. Armed with this information, he or she will be in a position to help you. He or she will draft or amend the required documents. One of which will more than likely be your living trust, but frequently, there is more. Your CPA will be instrumental in the documentation of many of the strategies involved.
STEP 6: The final step is the ongoing review process. At least annually, an update of your plan should be done to encompass any changes in the economy and the tax law, as well as in your personal situation and objectives. As a result of this process, you can be comfortable that your plan continues to be up to date.