Almost everyone goes for a medical health screening at regular intervals to check up on their health. In fact, your car and air conditioning too require servicing on a regular basis to run smoothly.
But, many people forget that these same principles apply to their financial plans as well.
Not reviewing a financial plan regularly can make it difficult to achieve financial goals, especially at a time of major change in one’s life, such as marriage.
How often should a financial plan be reviewed and why?
Apart from the scheduled reviews with your financial planner, here are five key indications it is time to relook your financial plan.
1. Change in financial expectations or goals
When making a financial plan, there must be a certain set of goals and objectives you anticipate achieving 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 your children.
These goals must be revisited after time has passed to adjust those that have changed due to economic conditions or inflation, for example.
If you are planning to retire at 50 years old, consider delaying this until 55 in order to have more earning years, or the amount invested needs to be increased.
A review of the financial plan enables you to determine whether the goals are realistically achievable given the present circumstances, and whether any adjustments are necessary.
The financial plan can also be changed because of changes in priority, getting married or expecting a child, which means making plans for the child’s future education fund.
2. Changes in income
You may have received a pay rise or a nice bonus. Or you may be facing a pay cut to help the company survive these tough times.
Any significant change in income will directly impact your financial plans. Positive changes may lead to an earlier achievement of your goals and allow you to dream bigger.
If there is a change in income, the financial plan must be reviewed and investment numbers and objectives revised. Perhaps the target date needs to move or the amount needs to be adjusted.
If there are goals that cannot budge, now might be the time to look for additional sources of income to help achieve financial goals on time.
3. Covering contingencies and emergencies
Financial emergencies happen with little or no warning and can cause major financial stress.
A medical emergency can burn a big hole in your savings, especially if there is no contingency planning, such as sufficient medical insurance. The cost of follow-up treatment must be considered as well as possible loss of income.
Damage to the car must also be covered if there is an accident as well as theft, as not having a car to get to and from work would lead to additional expense.
Such unplanned expenses will have a direct impact on one’s financial goals. This is when a review of the financial plan is necessary so one can manage well, even in difficult times, by planning 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 thereby affect financial plans.
For example, expenses for a growing family will be higher and more life insurance cover may be required so dependents are covered in case one dies unexpectedly.
Proper estate planning is important, starting with writing a will in order to avoid any disputes over assets later. Any changes to the family or beneficiaries 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 when framing a financial plan.
However, these are not static and will change as life progresses.
A young investor is more likely to be willing to take greater investment risks.
Hence, their portfolio will be skewed towards riskier asset classes such as equities. But those who are closer to retirement would have a lower risk tolerance level, which would affect asset allocation.
Similarly, if a certain goal is close to realisation, the asset mix for that goal must be moved 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 will increase the likelihood of achieving financial goals by allowing one to incorporate any personal or economic changes in the financial plan.
A review also allows one to analyse individual investments and determine whether any investment rebalancing or adjustments are needed.
A licensed financial planner can help plan one’s route to meeting financial goals.