The words "financial planning" seem to be a relatively recent addition to the jargon of the investment marketplace. The phrase often is embellished with a prefix, such as "total," "comprehensive" or "conceptual."

Still, many persons both inside and out of the financial community are uncertain as to what the phrase actually means.

The concept of financial planning originated in the late 1960s when financial markets were in disarray. The Dow Jones industrials were aggressively backing off from the 1,000 mark for the second time in less than four years. The prime rate was moving toward the then-unheard of rate of 8 percent and inflation was starting to become a household word. (Our Canadian neighbors were feeling the ravages of a full 4 percent!)

Stockbrokers, who only a few years before were comparing yacht prices, began comparing employment opportunities. The go-go funds had turned and gone. Mutual funds were restricted from paying front-end commissions on contractual plans. Numerous large and small brokerage firms merged to avoid financial ruin brought about by chaotic market conditions and investors' apprehension at economic uncertainty.

In this environment, stockbrokers, bond salesmen, investment companies, accountants, attorneys, insurance agents and realtors all recognized that they had been competing for the same client dollar. Too frequently, the most articulate and persistent seller closed the deal and made the commission. But some were starting to ask, "What's best for the customer?" -- an approach that appealed to many scared and confused clients.

From this unsettled atmosphere the financial planning industry was born.

In the early 1970s, the College of Financial Planning was established. It was the first serious attempt to define and teach skills for the financial planner and to establish a professional code of ethics. Headquartered in Denver, it has graduated about 3,000 "certified financial planners."

James Johnson, the school's dean emeritus, stated that "a financial planner provides a service by translating the economic needs and goals of a client into compatible financial products, services and arrangements."

The development of the financial planning industry has had a broad and, for the most part, beneficial effect. Numerous "how to" guide books are now available for the layperson. Financial planning seminars are conducted in even the smallest cities.

And, most importantly, the general population has come to recognize that it should not approach its financial affairs in a piecemeal fashion. It takes overall planning to maximize return.

Financial planning means making a comprehensive review of your total financial situation, acknowledging both whimsical and realistic objectives and determining what necessary changes need to be made in the short and long term.

There are three general principles of financial planning.

The first is that you are part of a triangle. The points consist of yourself, federal and state governments (as tax collectors) and investment alternatives. You can reduce your obligation to the tax collector by astutely investing.

The second principle is the formula: wealth equals money multiplied by return, multiplied by time. The time it takes to build wealth is one factor that is often overlooked.

Third, build your financial pyramid with the broad necessities at the base and conclude with speculations and gambles at the top. But remember that the greatest risk is doing nothing. Inflation and taxes take a heavy toll.

If you are comfortable with your basic necessities of shelter, insurance and some modest assets, then you can be mentally prepared to take market risks. But if you borrow to invest for a home down payment, then you started your investment program at the top of the pyramid, which is an extremely unbalanced position.

The first step toward planning your financial future is to construct and analyze your balance sheet. A balance sheet lists your assets and liabilities and shows your net worth.

On the top portion of a page list assets: home (at market value); car; personal possessions; cash and its equivalents (CD's, money market funds, savings); stocks and bonds at present value; partnerships; business interests; cash value of life insurance (listed in the policy); retirement accounts; stamp and coin collections; jewelry and collectables; works of art, and other real estate.

On the bottom part of the page list liabilities: mortgage(s); loans; credit card debts; accounts payable, and all outstanding obligations. Subtract the lower figure -- let's hope it's the liabilities -- from the higher figure and you have your net worth.

Net worth in and of itself is deceptive. Most of us tend to overvalue some assets, such as cars and furniture, even homes. If our assets have greatly appreciated, we usually forget to include a contingent tax liability against their sale.

Still, net worth has its place. By using compound interest tables you can find that at a 7.2 percent rate of inflation or appreciation, your present net worth without any further investments should double every 10 years. Add to this the compounded benefit of your annual savings, and you can target your estimated "bench mark" net worth any time in the future.

For example, if your net worth today is $124,000, in 20 years it should be near $500,000 (doubled in 1991 and again in 2001). If you save $500 per year at 5 percent, you should add $16,500 to your 2001 estimated net worth.

The term "bench mark" is used to mean a minimum target. It can be interpreted as your future worth if you take no risks and consider no opportunities.

Having completed the exercise on net worth, start analyzing your financial situation. Look at the percentages in various categories. For example, our theoretical net worth of $124,000 might be broken down as follows: Equity in home: $50,000 -- 40% Furnishings: $10,000 -- 8% Auto: $8,000 -- 6% Retirement Account: $7,400 -- 6% Jewelry: $2,000 -- 2% Money Market Fund: $16,000 -- 13% Credit Union: $4,000 -- 3% Checking Account: $2,000 -- 2% Stocks: $8,000 -- 6% Insurance (cash value): $2,600 -- 2% Gold: $4,000 -- 2% Silver: $2,000 -- 2% Partnerships (oil, gas): $8,000 -- 6% Total: $124,000 -- 99%

Next, review your assets and compute your investable assets. If your stamp collection was started when you were in grade school and you're going to give it to your son or daughter eventually, it doesn't have, for our purposes, an investable value. Normally you exclude your car, retirement accounts, furnishings and even the equity in your home unless you are in the process of refinancing or selling.

For investable assets we are interested in those items that can normally be turned into cash within 60 days. (Remember to subtract any money you owe on an asset before considering its investable value.) This gives you your investable assets or working capital. It is this amount we will use as the basis of gauging your investment performances during the next 12 months.

In the example above, the first four categories account for 60 percent of the assets and are not investable. The $8,000 partnership interest cannot be readily turned into cash, so that leaves $38,600 of investable assets. Of this amount, 57 percent is in cash equivalents; 21 percent in securities; 7 percent insurance, and 15 percent in metals.

In breaking out these percentages we must ask if you are properly diversified and if your investment strategy coincides with the economic outlook . Generally, there are five risks to which an investment portfolio can be exposed: inflation or deflation; interest rate changes; business risk; market risk, and illiquidity risk.

As we are all aware from the experience of the 1970s, "hard assets," such as real estate and precious metals, perform best in periods of inflation. On the other hand, fixed-income investments, such as bonds, increase in value as deflation and lower interest rates develop.

Business risk has to do with putting all your funds into one stock, and market risk is the same concept on a wider scale (such as putting all your funds only into stocks). In other words, you should diversify across several investment areas and across industries within a particular area.

Finally, consider your needs for liquid funds before you commit funds to various investment areas.

In this particular example, since a majority of your working capital is in cash equivalents, you should recognize that your return or yield is highly susceptible to interest rate changes. An individual may choose to diversify into real estate. Or if an individual believes that interest rates will be lower in the next one to two years, he or she may want to shift some cash equivalent investments into bonds and securities. Another question is what benefits and return (probably close to 6 percent) he or she is receiving on the cash value insurance. Should you borrow on your policy and invest for a higher yield?

Financial planning is a process of both anlysis and planning. In evaluating your balance sheet and investment strategy, you need to look at how your current investments are working for you, whether they provide adequate diversification and whether they coincide with your outlook for economic conditions.