5 Situations That Call for a Review of Your Financial Plan

May 18, 2022

Listen to 5 Situations That Call for a Review of Your Financial Plan

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Financial Planning is the key to ensuring that you will be financially secure throughout your life. Your financial plan is usually designed in a way so that you can achieve your investment goals within the desired timeframe. Principles of personal finance talk about the creation and execution of a financial plan for the financial well-being of an individual. However, if your needs change, your cash flow changes, and the environment around you changes, what you plan today may not work next year.

We engage in yearly check-ups for our health, vehicles, and more. But do your finances receive the same attention? Periodic financial plan reviews can assist you in prioritising your objectives and developing a workable strategy to avoid potentially costly financial mistakes.

It is critical to remember that a financial plan requires ongoing attention. As circumstances in life change, you should examine and alter your financial strategy periodically. You should schedule regular meetings with your financial adviser to discuss your objectives. The goal of these reviews is to keep you focused on your financial objectives. By doing this on a periodic basis, you are able to adapt to changing circumstances.

Life is unpredictable; no one can foresee what will happen next. Changes can occur at any time and in a very short period of time. You may lose your work, receive a significant promotion, or welcome new family members. All of these factors have an effect on your financial plan, and you need to make changes accordingly to keep your plan relevant and effective.

There are times when it becomes absolutely necessary to review your financial plan; failing to conduct a periodic review may lead to a negative impact on your investments, which can jeopardise your financial goals. This article will discuss the 5 situations when you should consider reviewing your financial plan to make necessary changes.

Here are a few situations that call for a review of your financial plan:

1. Change in your financial goals

As you age and evolve, your outlook toward money changes. You will have different goals and priorities when you are in different age brackets. For example, when you are in your 20s, you would like to save for your marriage and plan vacations. As you become older and have kids, you begin to think about their education and marriage. Another goal that you should plan for since the beginning of your earning years is your retirement.

5 Situations That Call for a Review of Your Financial Plan
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At least once a year, you should examine your financial plan to see if any unmet financial goals require your attention, assess your retirement corpus, and review your asset allocation. Simply put, a thorough examination of the current financial plan is essential, and it should not be done in an ad hoc manner.

Apart from this, the key milestone events in our lives, such as marriage, the birth of a child, children's education and post-graduate education, etc. Call for a review of your financial plan because then it's not just you who you are planning for. You need to plan for your spouse, kids, and your family. Further, it is not just about investments; it is all about your insurance needs too. For example, if you have bought an individual health insurance cover, now it is time to go for a larger family floater health insurance coverage if you are married.

As a result, the risk-return expectations may change. Thus, your investments and financial strategies need to be reviewed periodically and updated to reflect the changing goals.

2. Change in your financial conditions

The reason why you should regularly review your financial plan is to reflect any change, be it internal or external, in your financial conditions. For example, you can retire later than you originally Intended to or settle to purchase a house that is lower in value than what you expected earlier. This allows you to adjust your investment options & strategy, and often other priorities as well.

When someone is considering a loan for a large purchase such as a home or property, it is necessary to assess their financial plan. This has an influence on your financial condition because you will be responsible for loan EMIs. Loans might help you reach certain financial goals faster, but loans also bring along liability. Meanwhile, as the EMI begins, you should revisit your financial plan to determine how much you can set aside for other goals as your financial situation changes as your expenses rise.

3. Change in income

There are other major events like promotion, job change, job loss, long sabbatical, early retirement, etc., when your income might change quite drastically. Positive changes in income, such as a raise in salary, an increase in business income, a second income if your spouse works, and so on, allow you to contribute more to your financial goals, allowing you to attain them sooner.

A rise in compensation does not always imply an increase in expenses. As you advance in your career, you will save more money, which must be invested. This is best accomplished if you plan to examine your financial strategy regularly.

On the other hand, many people have experienced job losses, mid-career adjustments, and other consequences due to the pandemic. Financial plans need to be reviewed in such lean periods too. When income falls due to a job loss or pay cut, compromises may have to be made in specific goals, and/or the target date of the goal/s may be required to be pushed by a few months or years. In the same way that you may need to increase your investments in the event of a promotion or pay increase due to a work move, you may need to reduce your investments under challenging circumstances. This necessitates a review of the financial plan.

 

4. Change in your risk profile

Like how your priorities and goals change in life, your risk appetite and perception often change. Each of you can bear a certain level or degree of risk, and this is called your 'risk appetite.' It changes depending on a combination of factors such as our age, income & expenses, the financial responsibilities shouldered past experiences, and time to achieve the envisioned goals.

A younger person, for example, maybe ready to take more risks and engage in more aggressive avenues such as equity, whereas an elderly person may choose to protect his principal by investing in debt instruments. Similarly, if your net income is high, you may be willing to take more risks, yet, your risk appetite may be limited if your net income is low. In addition, unfortunately, if you face any financial distress, your risk appetite will be low due to instability in your financial health.

Changes in risk profile must be accounted for in the financial plan through a review to make appropriate changes in the asset allocation and investments aligned to every goal. As your life changes, your risk profile will change, calling for the need to change your financial plan after proper review.

5. Unforeseen events

Another reason your financial plan may go haywire is if you have unforeseen expenses for which you are unprepared financially. You are all aware of how an unexpected catastrophe, such as a pandemic might significantly affect your financial plan. It is critical to review your financial plan periodically to deal with any contingencies that may cause financial stress. These could be layoffs, medical emergencies, unexpected expenses such as house repairs, car breakdown, inheritance, etc.

Life is unpredictable, and even the most diligent and healthy people might be diagnosed with a fatal sickness. It is preferable to assess one's financial situation and purchase appropriate insurance to cover hospitalisation and critical illnesses. Life-threatening illnesses might throw financial plans off. The occurrence of one of these conditions in the family necessitates a financial plan assessment. Positive or negative consequences can significantly alter your financial plan.

This can have an effect on your cash flow and financial plan. You'll either need to boost your insurance coverage and include your dependents in your will, or you'll need to get a Family Floater Insurance Plan. Also, when your children are married and no longer reliant on you, you need to adjust your financial strategy accordingly.

Ideally, you should insure against unforeseeable risks by acquiring enough health, life, and property/asset insurance. failar as possible.

Given that, maintaining a contingency fund always helps in such unforeseen events. However, if you do not have a contingency fund, then you will be forced to dip from your savings, which can upset your financial goals. These elements call for a periodic review and change in the financial plan.

A periodic review of your financial plan benefits you in several ways: it will reflect personal changes, account for risks and opportunities that arise, reset asset allocation wisely, and better reorganise your goals. The conditions stated above are occasions when one should review their financial plan and make necessary changes. This will keep you from becoming financially stressed while also allow you to meet your life goals on time.

Your financial plan must account for any personal and financial changes in your life. This isn't to say that your financial plan should only be reviewed if you experience the life changes listed above. Even if nothing important happens in your life, you should examine your financial plan at least once a year to assess the state of your investments.

Therefore, keep in mind that merely creating a financial plan will not help you attain financial stability. However, reviewing your financial plan periodically will lead you to achieve your envisioned financial goals and maintain stability.

PS: At PersonalFN, we understand that not everyone might have the expertise to review their investment portfolio. I recommend that you to enrol for PersonalFN's Mutual Fund Portfolio Review Service.

It is a personalized portfolio review service designed to boost the returns of mutual fund investors. And it reviews your existing mutual fund portfolio, helps you correct your past investment mistakes, and suggests the best possible options for you. Read here for more details...

If you wish to review your investment portfolio to identify if it requires reallocation or rebalancing, enrol for PersonalFN's Mutual Fund Portfolio Review Service today!

 

Warm Regards,
Mitali Dhoke
Jr. Research Analyst



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