Periodically reviewing your financial plan is a much needed action especially when some major changes are happening in your life.
Today, almost everyone gets a medical check-up done at regular intervals to ensure that our health is at its peak knowing that it is easier for us to achieve our dreams when we are healthy. Most of us also get our personal assets (such as a car, air conditioner, refrigerator, etc) serviced a few times a year to avoid them getting out of use.
But, many people forget that the same principles should be applied to our financial plans. Without a timely review of your financial plans, it will be difficult to achieve your financial goals without taking consideration of your current situation, especially in the new normal.
Why and When should you re-review your financial plan? Aside from your scheduled appointments with your licensed financial planner here are some key indications that a review is in order.
#1. Change in Number Expectations or Priority Adjustment for Financial Goals
While preparing financial goals, there must be a certain set of goals and objectives that you anticipate to achieve within a period of time. For example, you are saving to buy a new house or for the higher education of your children. But, you may need to revisit all your goals after certain time has passed in order to adjust the amounts invested and target based on the recent financial conditions e.g economic situation and inflation rate. In such cases, it may also be prudent to push your goal further away, if possible. For example, if you are planning to retire at 50, consider retiring at 55 instead, to give yourself more earning years. A review of your financial plan enables you to determine whether your pre-determined goals are achievable, given the present circumstances, and also allows you to make them more realistic.
You can also make changes to your financial plan based on your priority adjustments. For example, if you are married and will soon have kids, you can start making plan for your kids future education fund. This will prepare you for the uncertain future and ensure the best education plan for your children.
#2. Change in Income
You may have received a raise in salary recently or may receive it soon. Or, you are facing a permanent pay cut to help your company survive these tough times. Any big change in income would directly impact your financial plans. It may not only lead to the early maturity of your goals but also let you dream bigger in life.
In the event of a change in income, a review of financial plans becomes mandatory to revise the investment amount and objectives. Perhaps a financial goal’s target success date needs to move or the amount adjusted. If there are goals that cannot budge, this is the time when you may learn that having an additional source of income is necessary to maintain monthly investments needed to achieve your financial goals on time.
#3. Covering Contingencies and Expenses
Financial emergencies often times appear with no warning. For one, medical emergencies may burn a big hole in your monthly savings, especially if no preparations are made in your financial plan for such contingencies. The number of accidents and medical costs associated with them is rising. Even if you claim medical insurance for meeting these expenses, the remaining costs for follow up treatment may be higher.
Or, you may have to cover the cost of your damaged car after a bad road accident or worse, replacing a car that has been stolen. You are in desperate need for a functioning car for your everyday commute for work and family matter and this may lead to another loan to pay.
Such unplanned expenses will have a direct impact on your financial goals. This is when a review of your financial plan are crucial to ensure you can survive with good planning even in difficult times.
#4. Number of dependents
Change in marital status, the birth of a child, or the death of a loved one can largely impact cash flows and thereby affect your financial plans. For example, if your family is growing you will need to raise your life insurance cover so that the financial requirements of your dependents are covered even in your absence. It is important to write a will and select nominees for your assets in order to avoid any disputes after you. In case there is a change in your family or beneficiaries, the same should be reflected in your will as well.
#5. Change in risk appetite and risk tolerance
Risk Appetite (which is a function of Age, Past Experience, Knowledge etc.) and Risk Tolerance level (which is a function of Income, Expenses, Financial Responsibilities, and Nearness to Goals amongst others) act as important determinants while framing your financial plan. However, these determinants are not static and may change as you progress in life.
For example, if you are a young investor, you would be willing to take more risks. Hence your portfolio will be skewed towards risky asset classes such as equities or real estate. But if you are close to retirement, your risk tolerance level might be lower, which would need to be revised in your asset allocation.
Similarly, if you are close to realization of a certain goal, the asset mix for that goal will need to be shifted to less volatile asset classes such as debt and fixed income instruments.
An annual review (or bi-annually in some cases) will increase the possibility of fulfilling your financial goals by allowing you to incorporate any personal or economic changes in your financial plan. A review also allows you to analyse your individual investments and determine if they are worth keeping. You can also consult a licensed financial planner to help you plan your route towards meeting your financial goals.
What other reasons do you think can affect your financial planning? Share with us in the comments section below.