The importance of reviewing your financial plan

Imagine you and your family decide to go out on a picnic. It is something which your spouse and children have been asking for a long time now. You zero down on a weekend, pack your bags with food and other belongings and begin to drive down the long road to your weekend getaway.

Since this is your first trip in this new direction, you clock your drive and within 2 hours you think you have reached your destination. But you find yourself in a barren stretch of land with no picnic spot in sight. You don’t understand what happened – you reason that you stopped after 2 hours of drive as that is how far the venue was away so why have you landed in no man’s land?

The issue you realize to your horror and your family‘s disappointment is that you have driven off onto a wrong direction and that you did not stop occasionally to check whether the route you were taking was right. You just assumed it was right.

Now imagine if a similar situation were to happen to you in life practically and that instead of say Rs 25 lakhs for your child’s marriage, you end up with say Rs 5 lakhs only with a year to go for the marriage? Caught on the wrong foot, you will now borrow money possibly via personal loans or through other available sources.

You don’t want to be in such a situation, do you? If only you had reviewed your financial progress each year !

Why reviewing your financial plan is important ?

A review of your financial plan and its progress is a review of whether you are on track to reach your aspirations or goals in life smoothly. It is practically impossible to assume that you can without any manual intervention.

Saving for a goal, say your child’s marriage might require you to put aside, say Rs 10, 000 each month in a mix of equity and debt related instruments.

The figure of Rs 10,000 was arrived at by your financial planner by taking many parameters into account – things like rate of inflation, your expected spend on the marriage plans, the number of years away when the marriage will take place and the assumed rate of return that equity and debt will return. If you ponder for a moment, many of these things will change month on month, if not each year. If the underlying parameter changes, so will the amount of Rs 10,000 that you are currently saving each month !

If the new amount is less than what it was earlier, then you are probably safe but if the new amount is more, then you might be in trouble as it now means you need to save more each month. But if you do not perform this activity, you will be like the lost soul driving in the wrong direction.

Reviewing a financial plan each year is mandatory. If you can possibly do that each quarter, nothing like it. While you can consider this as a thumb rule, you also need to ensure that certain events can make this review more important.

For example, if the stock market tanks and remains depressed for a number of months continuously, then you will know that the review will throw up some interesting observations. You might not be able to do much to mitigate such scenarios or circumstances as they are beyond your control but it is necessary to be aware of what you are going to get than be surprised and shocked when you have a lot lesser than what is needed for your child’s marriage.


Advantages of a review

The advantages of the review of a financial plan are as follows:

  1. It gives you a holistic picture of where you are currently.
  2. It shows how you have progressed from the last time you did your plan. So in essence, it tells you how well or how bad you have performed.
  3. It gives you an opportunity to tweak things to make the goals more practical.
  4. It allows you to respond practically to your financial situation – so you could forgo a less important goal say of an expensive vacation for a more important goal like saving for your retirement.
  5. It tells you what you can have in your life and what you need to let go.
  6. It gives you a chance to make amends so that you can stay on track to meet your commitments to your family and yourself.
  7. It allows you an opportunity to weed out the bad performers in your portfolio and bring the stellar ones that will help you get to your destination.
  8. It allows you to ask, understand and clear your doubts with your financial planner.
  9. It lets you gel and bond with your advisor and helps you know more about money, the thing we all work for and neglect more often!

Try doing a review with your financial planner and feel the difference.