Periodically reviewing your financial plan is a much needed action especially when major changes are happening in your life.

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Today, almost everyone gets check-ups done at regular intervals to make sure that health is in good condition. This includes medical and dental checkups for ourself, and also for our personal assets such as our car and air conditioning. Knowing and keeping our selves and our assets in good health makes sure everything runs well and any potential problems are nipped in the bud. 

But, many people forget that these same principles apply to our financial plans. The lack of timely reviews of your financial plan makes it difficult to achieve your financial goals in consideration of your current situation, especially in the new normal.

Why and when should you review your financial plan? Aside from your scheduled regular reviews if you have engaged your financial planner, here are five key indications that a review is in order. 

#1. Change in Financial Expectations or 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. These financial goals may include saving for your retirement, saving to buy a new house or saving for the higher education of your children.

But, you will need to revisit your goals after a certain time has passed to adjust goals which have changed due to financial conditions e.g. economic condition and inflation rate. In these cases, it may be prudent to adjust your goals. For example, if you are planning to retire at 50, consider retiring at 55 instead to give yourself more earning years or you need to increase your investment amount. A review of your financial plan enables you to determine whether your goals are realistically achievable given the present circumstances, and whether any adjustments are necessary.

You can also make changes to your financial plan based on changes in priority. For example, if you are recently married and find out the joyful needs that you’re expecting, you will want to start making plans for your child’s future education fund. This will prepare you for making the appropriate education plan for your children.

#2. Changes in Income

You may have received a raise in salary or a nice bonus. Or, you may be facing a pay cut to help your company survive these tough times. Any significant changes in income will directly impact your financial plans. Positive changes may lead to an earlier achievement of your goals and also let you dream bigger dreams.

In the event of a change in income, a review of your financial plan is needed to revise your investment numbers and objectives. Perhaps a financial goal’s target success date needs to move or the amount needs to be adjusted. If there are goals that cannot budge, this is the time when you may find that having  additional multiple sources of income is necessary to achieve your financial goals in a timely manner.

 #3. Covering Contingencies and Emergencies

Financial emergencies often appear with no warning and in rapid succession causing major financial stress! For example, a medical emergency may burn a big hole in your savings, especially if no preparations are made in your financial plan for such contingencies such as sufficient medical insurance. And then there are expenses for follow up treatment and one may even face loss of income.

Another example is  you may have to cover the cost of your damaged car after a bad road accident or replacing a car that has been stolen. Then as an added whammy, you are in desperate need for a functioning car for your everyday commute for work leading to further increased expenses. 

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 by making sure you have planned for the unexpected.

#4. Change in 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 have higher expenses and may need more life insurance coverage so your dependents are covered in case you pass away unexpectedly.

It is important to have proper estate planning starting from writing a will and appointing beneficiaries for your assets in order to avoid any disputes. 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 Tolerance

Risk appetite (which is a function of Age, Past Experience, and Knowledge) and Risk Tolerance level (which is a function of Income, Expenses, Financial Responsibilities, and Nearness to Goals) act as important determinants while framing your financial plan. However, these determinants are not static and will eventually change as you progress in life. 

For example, if you are a young investor, you are likely more willing to take higher investment risks. Hence your portfolio will be skewed towards riskier asset classes such as equities. But if you are closer 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. This helps to avoid a scenario of being forced to liquidate your assets during a market downturn or correction.

Conclusion

An annual, bi-annually or quarterly review will increase the likelihood of achieving 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 any investment rebalancing or adjustments needed. You can also consult a licensed financial planner to help you plan your route towards meeting your financial goals.

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What other reasons do you think can affect your financial planning? Share with us in the comments section below.