Why is it critical to review a financial plan regularly?

Why is it critical to review a financial plan regularly?

by 5paisa Research Team Last Updated: Mar 30, 2022 - 12:39 pm 188.3k Views
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It is essential to have a financial plan in place in order to provide financial assistance to your family and secure a financial burden free future for them. However, to make the plan work in the ever changing environment and to achieve your financial goals, it is critical to review your financial plan regularly.

Just like a regular medical check-up is required to prevent medical emergency, a financial plan also requires a regular check to avoid any adverse impact from changing market scenario.

Why is it critical to review a financial plan regularly?

A lot of factors can hurt your financial plan. Below are some important reasons for evaluating your financial plan at regular intervals:

Achievable financial goals

Your financial goals could become unachievable owing to a lot of factors. Sometimes, it becomes necessary for you to make certain changes in your financial plan. For example, while making your financial plan, you would have planned to buy a new home at the age of 40 or save Rs 5 lakh for your child’s education. However, due to rising inflation and other economic factors, you will have to make certain changes – like increasing the saving from Rs.5 lakh to Rs.7 lakh, or postponing the idea of buying a new house till the age of 50. This is only possible if you review your financial plan at regular intervals. Reviewing your goals at regular intervals gives a better idea about which goals are achievable and which need change.

Change in income

Change in income can impact your financial plan in a big way. If there is a rise in your income, you can invest more towards your financial plan, thereby increasing your returns. A regular review of your financial plan is required to understand where the additional money can be invested. On the other hand, given the market conditions and rising inflation, it is possible that you can also experience a cut in your salary. It would mean that you will not be able to invest the amount you were investing before. This makes reviewing your financial plan compulsory as to know where you can decrease your investments and still achieve your financial goals.

Risk appetite

Your risk appetite (will to take risks) will change with time, which will reflect in your financial plan. When a person is young, he/she tends to take more chances and invest in asset classes, which are considered risky. On the other hand, when an investor is close to retirement, he tries to minimize risk and invest in less risky asset classes such as mutual funds or SIP. These changes in the asset classes constitute the primary reason that you should regularly review your financial plan. Studying the financial plan will help you to allocate your assets efficiently, and you can minimize the risk of your overall plan.

Expenses and contingencies

A medical emergency can come knocking at your door anytime. Any emergency can dig a hole in your pocket and savings, thereby creating a financial burden on you and your family. Even if you have made provisions for contingencies in your financial plan, the cost of medical treatment is continuously rising. There is a need to regularly review your financial plan to know if you have enough for emergencies given the ever rising inflation. If you think you have not invested enough towards medical emergencies, you can always pump in more money in your financial plan.

Dependents

Family members who are dependent on you financially is another reason to review your financial plan. If you have kids who are studying in school, you must invest towards their future – higher studies, wedding, etc. Once your children start earning, you can again review your financial plan and allocate your assets accordingly. 

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