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Tuesday, October 1, 2013

Significance of reviewing your financial plan

Your financial plan is one which chalks out your financial goals and how you plan to achieve them. As the situations in life change, your financial plan also requires regular reviewing and change. Just as how you undergo regular health checkups to review your health and regular service for your vehicle or electronic appliances, your financial plan also needs regular examination. Here are a few reasons on when it becomes important to review your financial plan.

Change in financial conditions: The first reason why you should review your financial plan regularly is to reflect any change in your financial conditions - be it internal or external. Sometimes you realise when you review that you have not progressed much towards your goals despite a considerable time having lapsed. This requires you to change your investment plan, and sometimes other goals as well - for instance, you can retire later than you initially planned, or settle to buy a house which is lower in value than what you planned earlier.

Change in income levels: Given the uncertain market scenario, it is possible that your income may reduce or you may not get the variable pay you expected. In such a case, your financial goals may not be met, as your investment levels may reduce. This calls for a review of your financial plan. Another case is when you change jobs and receive a hike in income levels. This may lead to earlier realisation of financial goals, and as a result, gives you flexibility to bring in additional goals. You may also find that you have not withdrawn your PF balance when you shifted jobs, which will require you to change your retirement goal funding plan.

Sudden expenses: Another reason why your financial plan can go haywire is if you have sudden emergencies for which you are not financially prepared. Maintaining a contingency fund always helps in such cases. However, if you do not have a contingency fund, then you will be forced to dip from your savings, which can upset your financial goals. This calls for a review and change in the financial plan.

Change in the number of dependents: When you get married or have children, your responsibilities and dependents increase. This can impact your cash flows and your financial plan. You will have to increase your insurance cover and include your dependents in your Will. Similarly, when your children are married and not dependent on you, you should change your financial plan accordingly.

Change in goals: You will have different goals and priorities when you are in different age brackets. For example, when you are in your 20s, you would like to save for your marriage and give holidays a priority. As you become older and have kids, you begin to think about their education and marriage. Retirement is another goal which needs to be planned for, from the beginning of your career. But many people ignore this, and start planning for retirement in their 40s only. Thus, your goals change as you progress in life. As a result, your investments and financial strategies also need to be updated to reflect the changing goals.

Change in risk profile: Similar to how your goals change in life, so does your risk appetite and risk tolerance. A younger person may be willing to take more risk and invest in aggressive avenues like equity, while an older person may want to safeguard his principal and invest in debt instruments. As your life changes, your risk profile will change, calling for the need to change your financial plan after proper review.

All personal and economic changes in your life need to be incorporated in your financial plan. This does not mean that your financial plan should be reviewed only if you face the above changes in your life. Even if things do not change, you must review your financial plan atleast once a year to analyse the position of your investments and see if this is helping you achieve your goals. Remember that merely creating a financial plan will not help you attain financial stability. Reviewing the plan regularly, making changes as required and leading a disciplined life will help you meet your goals and achieve financial stability.

Source:-The Economic Times

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