Seven situations when your financial plan merits a review

5 MinsDec 30, 2020

A financial plan is a roadmap to achieve all your envisioned financial goals –– buying a dream home or car, a foreign holiday, planning for children’s education and wedding and your retirement among others. 

financial plan

However, merely making a financial plan is not sufficient. There are known and unknown events which may be positive or negative that impact us and our finances. Hence it is important to review your financial plan at regular intervals and rebalance it, if required. 

Here are seven situations when reviewing the financial plan is necessary

(1) Milestone event – Change in relationship status, birth of a child, child’s education or wedding, demise of a family member, are some example of events that largely have a bearing on your cash-flows and financial plan. These milestone events may change your needs, goals and hence a review of the financial plan is necessary to address these changes appropriately. 

For example, after marriage, you may change your goal of buying a bike to buying a car. This change will impact the goal amount and/or your time horizon and hence, the financial plan needs to be redrawn to address the change.

Similarly, on the birth of your child, you may temporarily need to put on hold your plan of a luxury holiday and instead plan for your child’s school admission or any other immediate need. Also, with more dependents and responsibilities to shoulder, there is a need to relook at the current life insurance coverage to ensure your family’s financial security. When your children start earning, you may again need to review your financial plan and focus on your retirement. This would also be a good time to start estate planning, if you have not already done so. 

(2) Changes in financial circumstances – Positive changes in income such as salary hike, increase in business income, second income if your spouse is also working, and so on; facilitate contributing more towards the envisioned financial goals, thereby allowing you to achieve the goals sooner. On the other hand, when income falls due to a job loss or pay cut; compromises may have to be made in certain goals and/or the target date of the goal/s may be required to be pushed by a few months or years.

[Also Read: Investor Bias – know what it is and how to avoid it]

(3) Alteration in personal risk profile – Each of us can bear a certain level or degree of risk. This is called our ‘Risk Tolerance’ and it changes depending on a combination of factors such as our age, income & expenses, the quantum of contingency reserve held, the financial responsibilities shouldered, insurance coverage, past experiences, and time to achieve the envisioned goals, among others. 

For example, at a younger age, your risk appetite may be high; but as age progresses, the risk appetite may reduce. Similarly, if net income is high, you may not mind taking more risk; but if not, then the risk appetite may scale on the lower side.  

Reviewing the risk profile is not a one-time activity. Changes in risk profile must be accounted for in the financial plan, by way of a review, to make appropriate changes in the asset allocation and investments aligned to every goal. 

(4) Change in financial expectation or goals – As you age and evolve, your outlook towards money changes. Your financial priorities could be different than before. As a result, the risk-return expectations may change. 

Say, you decide to retire at age 55 rather than 60. In such a case, you would need to streamline your finances -- both in terms of inflows as well as outflows (by engaging in prudent budgeting exercise), assess if any other unfulfilled financial goal requires your attention, evaluate the retirement corpus built so far, check for assets that could draw a regular source of income during retirement, rejig your asset allocation, and then hang up your work boots. All this requires a detailed review of the existing financial plan and should not be done in an ad hoc manner. 

(5) Change in tax status – Any change in tax laws may have implications on your income. For instance, you could move into a different tax bracket, or it may have an impact on the income you earn from a particular investment. Your financial plan should capture this and ensure that your investments are tax-efficient so that you can earn better tax-adjusted returns. For instance, to take advantage of the tax deductions and reduce your tax liability you can invest in instruments such as Public Provident Fund, Equity Linked Savings Scheme, Tax-saver Fixed Deposit or National Pension Scheme. These investments will also help you build a long-term corpus. Remember, a penny legitimately saved from tax is a penny earned and can help you contribute to achieving your financial goals. 

(6) Opting for high-value loan – Loans can help you achieve certain financial goals sooner, such as buying a dream home, a car, or sending children abroad for higher education. But loans also bring along liability. Prepayment of loans or any changes in the interest rate may impact the cash flows and therefore, your financial plan must be reviewed to ensure that you will be able to manage the down payment/s and the Equated Monthly Instalments (EMIs) along with saving for your other financial goals. 

(7) Unforeseen situation – Your financial plan must be reviewed to handle contingencies that may cause any financial stress or any windfall gains which may impact you positively. These could be layoffs, medical emergency, unexpected expenses such as house repairs, car breakdown, inheritance etc. Positive or negative impact can cause changes in your financial plan materially. Ideally, you should indemnify the unforeseen risk by purchasing an adequate insurance cover for health, life and all your properties/assets. Reviewing the financial plan would take care that you sail through many of the challenges with less anxiety as far as possible. 

A regular review of the financial plan benefits in the following ways:

• Reflects personal changes, including revisiting the assumptions

• Accounts for risk and opportunities that come your way

• Takes into consideration regulatory change (related to laws governing taxation and products)

• Reset asset allocation sensibly 

• Facilitates reorganising of goals better

• Provides a better clarity of your cash inflows and outflows

• Makes it possible to keep track of your progress in achieving the envisioned goals and make any changes, if necessary.

There is no such fixed time when you should review the financial plan. Having said that, an annual review (or in some cases bi-annual) would be in the interest of your long-term financial well-being. 

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision