The lack of timely reviews of a financial plan can make it difficult to achieve one’s financial goals.
How often and why should a financial plan be reviewed?
Apart from the scheduled reviews if one has engaged a financial planner, here are five key indications that a review is in order.
1. Change in financial expectations or goals
While preparing a financial plan, there must be specific goals and objectives the individual thinks they can achieve within a certain period of time. These may include saving for retirement, saving to buy a new house or saving for the higher education of one’s children.
But, goals must be revisited after time has passed to adjust for changing economic conditions or inflation.
If the original plan was to retire at 50, postpone it until 55 to give more earning years, or increase the investment amount.
A review of the financial plan can help determine if the goals are realistic and achievable under the current circumstances and whether adjustments are necessary.
Priorities can also change. News of a child on the way would mean one must start planning for their needs and future education.
2. Changes in income
An individual may have received a raise or a nice bonus. Or one could be facing a pay cut to help the company survive these tough times.
Any significant changes in income will directly impact financial plans. Positive changes may lead to an earlier achievement of one’s goals or let the individual dream bigger dreams.
In the event of a change in income, the financial plan must be reviewed to revise investment numbers and objectives.
Perhaps the targeted success date needs to move, or the amount needs to be adjusted. If there are goals that cannot be changed, it may be time to look for additional sources of income.
3. Covering contingencies and emergencies
Financial emergencies usually happen with no warning and can cause major stress. A medical emergency may burn a big hole in the savings, especially if the financial plan does not cover such contingencies with sufficient medical insurance.
One may even face loss of income if it is a longer-term illness or follow-up treatment is required.
Or, one may have to cover the cost of a damaged car after a road accident or replace a car that has been stolen. Alternative transport while the car is unavailable would be another added expense.
Such unplanned expenses have a direct impact on financial goals. So a review of the financial plan would be needed to ensure one gets through an emergency by being prepared for the unexpected.
4. Change in dependents
A change in marital status, the birth of a child or the death of a loved one can impact cash flow and affect financial plans.
If the family is growing, expenses will be higher as more life insurance coverage may be necessary so dependents are covered in case of a sudden death.
Proper estate planning is important, starting with writing a will that clearly states who should inherit one’s assets in order to avoid disputes. If there are changes in the family or the beneficiaries, this should be reflected in the will.
5. Change in risk appetite and tolerance
Risk appetite (a function of age, past experience, and knowledge) and risk tolerance level (a function of income, expenses, financial responsibilities, and nearness to goals) are important determinants in framing a financial plan. These are not static and change as one progresses in life.
A young investor is more likely to be willing to take higher investment risks. Their portfolio will be skewed towards riskier asset classes such as equities.
But if one is closer to retirement, the risk tolerance level might be lower and the asset allocation in the portfolio would need to be revised.
Similarly, if a certain goal is on the horizon, the asset mix for that goal will need to be shifted to less volatile asset classes such as debt and fixed income instruments. This helps to avoid being forced to liquidate assets during a market downturn or correction.
An annual, bi-annual or quarterly review of the financial plan will increase the chances of achieving its goals by allowing the incorporation of any personal or economic changes.
A review also allows one to analyse individual investments and determine whether any investment rebalancing or adjustment is needed.
Consult a licensed financial planner to help plan the route to meeting one’s financial goals.