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What Is the First Step to Financial Planning?


Taking control of your finances can seem like a daunting task — so daunting that many people avoid it. The greatest challenge of the financial planning process is simply not knowing what to do or where to begin. However, following the steps of financial planning can actually be a very exciting and eye-opening experience.

Step 1. Assess Your Current Situation

The first step of the financial planning process is to assess your current financial situation. Start with the potential positive aspects of your finances, which are your assets and monthly income.

Some examples of assets are:

  • Cash Checking or savings accounts
  • Life insurance
  • Savings bonds
  • Property
  • Automobiles or other vehicles
  • 401(k)s or IRAs
  • Pensions
  • Stocks or mutual funds
  • Any other cash equivalent

After listing out your assets, list out your liabilities. These are your financial obligations, such as:

  • Credit usage
  • Monthly bills, such as utilities, insurance payments, etc.
  • Outstanding debts, such as a mortgage, car loan, student loan, etc.

Once you’ve listed assets and liabilities, calculate the values of each, and then subtract the liabilities from the assets. The final figure will be your current net worth.

Step 2. Define Your Financial Goals

The next step in the financial planning process is to list your goals. Planning for your future by using SMART goals does not mean abandoning your dreams. It’s actually the opposite: By developing your goals, you can assess what steps to take in order to achieve them.

Financial goals should be SMART:

  • Specific: Well-defined and clear.
  • Measurable: Something that you can measure or track progress.
  • Achievable: Attainable, not unrealistic.
  • Realistic: Relevant to your life, with reasonable expectations of attainment.
  • Timely: A defined timeline and start date.

As you develop your goals, list them from most to least important. Prioritizing goals will help you find a practical starting point.

Step 3. Create a Budget

In step one, you pinpointed where you are now, and in step two, created goals for where you want to be. Now it’s time to create the vehicle that gets you from point A, the present, to point B, the future: A budget.

You may view budgeting as something that restricts you, and you’re not alone. However, your budget is the backbone of the financial planning process. Without it, you’re traveling toward your goal with no map to help you navigate.

Your budget will help you manage your income and expenses. It’s also where you’ll be able to determine any overspending habits, many of which you may not even be aware of. This will help you identify areas where you can trim spending and, as a result, increase your residual income. Residual income, or the amount of money remaining after your monthly expenses (both essential and nonessential), is how you’ll determine the amount of time it will take to achieve your financial goals. When you reach this step, most of the hard work will already be done. The only thing left to do is to put your plans into motion and start your path to financial wellness through financial planning.

Step 4. Identify Alternatives

If you put an address into your GPS, the GPS will plot out what it calculates as the best route. However, there are often other ways to get to your destination. Maybe you want to avoid tolls, or you want to stay off the interstate; either way, you can choose a different route.

Likewise, the course to your financial future will likely not be a straight shot either. Things are going to happen in your life that will challenge your carefully crafted SMART goals. With this in mind, plan for alternative routes for those times when life calls for a detour.

For instance, you may make one plan to pay your mortgage off early so that you have increased assets. However, you could also increase your assets by making larger contributions to your 401(k). Plot multiple strategies for your financial goals to ensure the ability to pivot if the need arises.

Working with a Financial Advisor

The path to financial security doesn’t have to be taken alone. AAFMAA Wealth Management & Trust Relationship Managers are available to help guide you through the financial planning process. We work collaboratively with servicemembers, Veterans, and their families to help them achieve their financial goals.

To learn more about financial planning and management, contact us online or at 910-390-1425 today!