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Why is it important to review your financial plan? - Outside View by PersonalFN

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Why is it important to review your financial plan?
Dec 5, 2013

Today, almost everyone gets a medical check-up done at regular intervals. Yes, it is extremely important to remain in the pink of health to achieve our dreams in life. Most of us also get our personal assets (such as car, air-conditioner, refrigerator etc.) serviced atleast once in a year in order to avoid them getting out of use. Well, but what many forget is that the same principle applies to our financial plans as well. Without a timely review of your financial plans, you are most probably bidding a goodbye to your financial goals!

The following points would help you recognise why reviewing your financial plan is necessary:

  • Achievable Goals: While preparing financial plans, one defines certain set of goals and objectives thereto that he/she anticipates to achieve in a given time frame. For example, you could be saving for buying a new home, or for higher education of your children. But you may need to revisit all your goals after certain points in time to adjust the amounts (investment and target) based on the on-going financial conditions (such as inflation rate and economic environment). You see, it may so happen some times that you have not at all progressed or moved very little towards your financial goal since the time the plan was created. Here it is important to revise your investments and alter investment avenues/instruments. 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, giving yourself more earning years. You can also reduce the goal corpus that is required. For instance, if you wanted to buy a house for 75 lakhs, consider a house for 60 lakhs. 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.

  • Change in income: You may have received a raise in salary recently or may receive it soon. 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. Many companies maintain an Employee Provident Fund (EPF) account which helps employees to save for their retirement. Many a times, people switch jobs and their EPF balance lies idle with their previous company. You must attempt to retrieve this and also take it into account while reviewing financial plans. Given the present market conditions, it is also possible that many people witness a cut in their monthly salary. In such cases, review of financial plans becomes mandatory to revise the investment amount and investment objectives. Investors might need to generate another source of income to maintain their monthly investments.

  • Contingencies and Expenses: Any kind of medical emergencies may burn a big hole in your monthly savings, especially if no provisions are made in your financial plan for such contingencies. The number of accidents and medical costs associated with them are continually rising. Even if you claim medical insurance for meeting these expenses, the subsequent premiums that you pay may be higher. Apart from this, there could be some other additional expenses that may have increased since the last time you reviewed your financial plan. For example, you may have purchased a car in the previous year, for which you need to pay monthly EMIs and fuel expenses. Or your household expenses may have risen due to the general rise in price levels. Such unplanned expenses will have a direct bearing on your financial goals.

  • Number of dependents: Change in marital status, 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. However, if your children are grown up adults and are no longer financially dependent on you, then you need to consider your insurance portfolio as well, and take a greater coverage in health insurance and also reset life priorities. Also, 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.

  • Change in tax status: From the time you constructed your financial plan and till now, there could have been change(s) in the income tax laws in the country or the amount of income you earn. This might result in you falling in a different tax bracket and thus paying tax at a higher or lower rate. In such circumstances, you will need to revise your financial plans in order to plan your investments and expenses efficiently to reduce the tax liability. For example, if you fall in the highest tax bracket currently, then it would be prudent to undertake your tax planning activity prudently in order to optimally save tax, which enable you plan for your financial goals efficiently. Remember; when you are aiming to save tax, it is important to recognise that tax planning goes beyond the section 80C of the Income Tax Act and it is important to take benefit of the other provisions as well, in order to optimally save tax.

  • New goals: Priorities change over a period of time. For example, when you are in early 20s, your priorities would include going for a holiday every half year and spending heavily on your lifestyle etc. But your spending habits and goals would change once you have kids and have a family to support. Similarly, you might have new goals and other added responsibilities apart from existing ones which may not be updated in your old financial plan. New strategies and investments might be needed to be framed in the plan to meet these objectives.

  • 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 an important determinant 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 risk. 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 realisation 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. For example, if you have invested in equities, then it would be prudent to check the current standing and potential of stocks and equity mutual funds in your portfolio from time to time. It could be possible that a stock or equity mutual fund may not be performing well; and in case of an equity mutual fund scheme there could be a change in its investment objective or style, which no longer meets your purpose of investment.

PersonalFN believes that change is inevitable and procrastination is the enemy. It is vital for you to recognise that merely creating a financial plan is not enough. Timely reviews are imperative if you endeavour to meet your financial goals.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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