A financial plan is a method of evaluating an individual’s financial situation, both in the present and in the future. This is done by using several factors or variables in the present and predicting future values such as assets, cash flow and withdrawal plans. This type of evaluation will usually include organizing your budget and finances, and will include several steps or stages where the main objective is to increase savings and decrease spending in hopes of obtaining a better financial future.
It is important to understand that when it comes to financial planning, monitoring your financial plan on a regular basis will allow you to re-evaluate your goals and whether it is still something you want. Similarly to how you regularly attend health examinations, the main purpose is to see if there are issues or concerns. The same idea applies to your financial plan, it needs to be regularly reviewed and modified as your goals change. Furthermore, there are a couple things you should consider when reviewing your financial plans.
Change in income level
Your financials are changing at a rapid rate, and while it may seem unstable, it is important to continue to make modifications, especially if your income has changed. Depending on whether you receive a bump in your income, or a decrease, you may need to adjust your financial plan to take into account the change in income. You may even realize your goal at a faster rate, if your income increases.
Change in financial condition
Changes happen every day, whether they are significant or not, it is important that they are reflected in your financial plan. If you have not progressed as much as you thought you would, or perhaps there were significant delays, your financial plan must be modified. This can affect your goals and original investments. Some examples are that if you decide to change your rate of retirement, or perhaps changed your mind and would like to purchase a different property. Adaption is key.
Every now and then, an unexpected event may occur, this can be detrimental to your plan or assist you in your goal. It is important to be financially prepared for the worst-case scenario. Building an emergency fund will ensure that you don’t rely on other sources for funds, such as your personal savings. Prepare for the worst, and minimize the effects of any sudden expenses.
Change in the number of dependents
Dependents are individuals who rely on you financially and in other ways, the number of dependents can increase if you have family or children. They will require more of your time and money, this can negatively impact your financial plan. This can require you to improve your insurance coverage and include more dependents in your will. On the other hand, some dependents may become independent and will affect your financial plan accordingly.
Change in goals
Your goals will change as time progresses, what you wanted in your 20’s may not be what you want in the future. If you’re looking to travel more often, but decide to start a college fund instead, this will affect your financial plan. Another example is if you decide to start saving for your retirement, for some individuals they begin as early as their early 20’s. Your financial plans and strategies will need to be updated accordingly as your goals change.
Change in risk profile
The level of risk you’re able to take will depend on a variety of factors including age, financial situation, income, etc. For example, at a younger age, you are able to take more risks as you have more time to recover a loss. However, if you’re older and have a family to think about, you may consider less risky options. Throughout your life, circumstances will change and you will need to adjust your financial plan as needed.
Your life will incur many changes and will require adjustments to your original financial plan, these changes can be either personal or economic. However, this doesn’t meant that you should only review your plans when changes occur. It is important to review your plans at least 2 to 3 times a year to fully understand your current financial situation and how much you have grown. It is also important to remind yourself that your original financial plan will not be the same as time goes on, and will require constant changes to encourage growth and achieve your goals.