Financial Plan Review: What makes a Financial Plan workable?

Is financial planning a one-time activity?

Once the financial plan is created, do you need to continue your relationship with your financial planner?

Will the financial plan which you created in your early life, hold good till your retirement ?

Do you need to handhold with your financial planner untill you achieve all your financial goals ?

The answers to all these questions will be unfolded somewhere in this article.

1) Changes and Deviation:

When you create a financial plan, you create it with some assumptions.

a) Change in salary

One of the assumptions may be your increment rate. This increment happens on a yearly basis. Remember when there is any big change in income, it directly impacts your financial plans and so this is taken into account while making a financial plan,

Say you have assumed your salary increment rate at 12%. You may get only a 10% increment in one year and a 15% increment in another year. This is a change and a deviation from your assumption. Not only this, but there may also be a job loss, a job change, a promotion, long sabbatical, or other such events where your salary may change drastically. Then there is a need for a close review.

b) Change in the tax status

If you had a change in salary or maybe a change in the income tax laws and now you fall into a different tax bracket, then there is a need to revise the financial plan. It is done so that the tax liability is reduced. If you fall into the highest tax bracket, then you can undertake tax planning so that you can save tax optimally. Remember when doing tax planning, it’s not just Section 80 C of the Income Tax Act, there are also other provisions that can be used for your benefit.

c) Change in risk tolerance and risk appetite

Risk tolerance and risk appetite are important while making a financial plan. They keep changing. For example, as a young investor, you would be willing to take more risks and hence your investments would be directed into risky investments such as equity or real estate. But if you are retiring, your risk tolerance would be lower, and so your asset allocation has to be revised.

d) Change in your financial goals

Priorities change over time. One of your financial goals may be to buy a property at the end of 5th year. Though you have planned to buy the property at the end of the 5th year, you may locate a very good property at the end of 4th year itself. You don’t want to miss it. You may want to prepone your financial goal. At times, even after the 5th year, you may not be able to locate a good property. So you may want to postpone your goal for one more year.

Or for example, in your early stages of life, you would have wanted to spend more on lifestyle, entertainment, travel, etc. But this might take a turn when you are married and have kids and a family for which you are responsible. Again, this is a change and deviation from our original assumption.

In between, you may want to include a goal, remove a goal, or modify a goal. So reviewing your financial plan is needed.

2) The Relevance of the Financial Plan:

Decide if all the financial goals you set are still relevant. Have you lost interest in any or want to add new financial goals?

When you create a financial plan, it will be relevant to you 100%. At the end of one year, because of the changes and deviations as mentioned above, the financial plan created at the beginning of the year may be relevant to you only by 70%. At the end of the 3rd year, it may be relevant to you only by 30%.

A workable and achievable financial plan needs to accommodate the changes and control the deviations. To accommodate the changes and control the deviations, doing periodical financial plan review is important. Periodical financial plan review only makes the financial plan workable and achievable. The financial plan review makes the plan up-to-date and keeps it relevant.

3) Continuous Process:

Financial Planning is not a one-time activity. It is a continuous process. You should have a long term relationship with your financial planner. A professional financial planner can handhold with you during your journey towards financial goals. You need to periodically check if the financial plan is still on track, even after the changes in the circumstances. If it is not on the track, then how do you bring it back to the track?

Also sitting or just standing on the right track will not take you to the destination. On the right track, you need to run at the right speed to reach the destination at the right time. All these things need to be monitored frequently to check our progress. This monitoring becomes possible by doing periodical reviews on your financial plan.

Periodicity of Financial Plan Review

The next logical question is how frequently we need to do the financial planning review. Generally, once in 6 months, we need to do a review. If the situation demands, then we can go up to 4 reviews in a year.

Who initiates the review?

The Financial Planner or the client…? It depends. Financial Planner will initiate the review process once in 6 months to check things are going as planned or not. As a client, you may initiate financial planning review, when circumstances at your end changes like, you get an increment or promotion, the demise of one your dependents… During these kinds of situations, you need to come forward and initiate the financial planning review.

These are few factors based on which you know how often you should do a review.

a) Financial goals:

• You need to review your financial plan after achieving each of your financial goals.

b) Financial products:

• If you have financial products that mature at short intervals, you will have to review more often.

c) Personal factors:

If you have changes in the number of dependents, salary, etc. you will require a review of your financial plan.

You need to work out financial planning reviews periodically, then only the financial plan will work out for you. And this will help you achieve your financial goals promptly.

Happy Reviewing!

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