Life is a series of events. Some have a big impact and some have a small impact. Many of them have an impact on your financial plan. We can either be pulled and pushed by the tide or proactively manage the change. It is important to adapt the financial plan to the changes in life so that the financial plan is relevant.
If you plan once and forget about it, it will not be relevant 3 years or 5 years down the line. It is important to keep reviewing and tweaking the plan as per changes in your life so that it remains current and is relevant to the situation in your life.
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Let us go through some typical changes that occur in life and how adapting the financial plan helps.
1) First Job or Source of Income –
When you start earning, you have money in your hand. It has to be managed appropriately else you will leave it idle in the bank or spend it all away. Either ways, you are not helping yourself. You have to plan and review the plan on how much to spend, save and invest. Read – Investment strategies for young people
2) Changes in life –
As you grow, there are different occurrences in your life. Marriage brings in a lot of changes in your financial life. Your spouse might have a different view of finances or you might have a dependent or your household might have two sources of income. Each of this affects the financial planning. For example, if your spouse is dependent on you financially, you might have to bring in changes in the expenditure account. You might have to buy life insurance. If both are earning, tax planning has to be done keeping both incomes in consideration. You might think of taking a joint home loan account. When children come into the picture, financial planning is a different ball game again. (one or two – can you afford a baby?) You have to tweak your budget. You might have short term and long term goals for the family – a family trip to Disneyland, college education abroad etc. You have to input these in your financial plan and have measures to achieve them.
3) Financial setbacks –
The world economy is quite connected and turbulent. A crisis in one part of the world affects finances in different parts of the world. So you might face financial setbacks. For example, after the 2008 financial crisis in U.S, the unemployment rate in countries like India increased. After Brexit pound lost almost 20% – if you were in UK, you will know how badly that will hit your planning.
You might have to leave your job or your business might go through tough times but expenses will not stop. You need to update your financial plan in such cases. You should manage the emergency fund and investments for example. Your cash inflow might be less than the cash outflow. You should plan for such situations. For example, you might have to liquidate some assets. You need to have a strategy to take care of such situations so that you are not affected extremely.
4) Financial jumps –
You might get a fat bonus or your business income might get a leap because of an upward business cycle. What will you do with the extra cash? Will you splurge on some things or invest more? Is it better to pay off the home loan?
You can take a decision once you update your financial plan to see how the change affects your financial status. You will then be able to take a prudent decision.
5) Changes in Risk Appetite and Risk Tolerance –
Once they start earning, some people start saving using FDs. Then they buy insurance and then graduate to investing in MFs and stocks. Some people start investments in equity from a young age. But as the only thing in life that is constant is change, people change. Their risk tolerance levels and risk appetite levels change based on knowledge, events, financial status, etc. If you have seen some of your friends lose big money in the stock market, you might decide to stay away. But then taking no risk also prevents you from doing well financially and you may change your stance on stock markets after a point of time. The financial plan should be reviewed and set as per the individuals risk quotient. But if the risk profile changes, the financial planning should also be modified.
For example, there is no point in having a larger part of the portfolio in equity if you are going to spend sleepless nights thinking about losses. It is better to balance the portfolio a bit.
6) Retirement –
Retirement is a big milestone. The regular source of income stops but expenses are still there. Your children might be financially independent now. You may want to secure your health worries from a financial perspective. You will have other goals to achieve in the sunset years of life. The plan should be updated as retirement nears. You might want to stash a higher emergency fund. Your entertainment expenses might reduce as you will not have 2 weekend getaways a month. Your finances should be updated as per the changes.
7) Investments are dynamic –
Investment world is dynamic beyond our imagination. Check Infographics – 10 commandments of Investing
A regular review will help you achieve your financial goals by allowing you to incorporate personal and financial changes in the plan. It will enable you to keep a check on the investments. For example, you might have invested in an equity mutual fund 5 years back. Today the mutual fund may have changed its investment objective which does not match your reason to invest in it. What about fluctuations in PPF & FD rates? You can then make changes in your portfolio.
As you can see, life is pretty dynamic. There are changes that can be foreseen and some are unpredictable. The changes can cause physical, emotional and financial changes. It would be easier to handle all the other changes if your are finances are in order. It will one less thing to worry about.
Must share your experience of concern is the comment section.