“Knowing is not enough; we must apply. Willing is not enough; we must do.” – Goethe
Most people consult their family physician when they are faced with health problems. The physician diagnoses the problem and writes down the prescription to be followed to regain health. The story is almost similar when you approach financial planner with your financial problems.
The financial planner prepares a financial plan to help you achieve your financial goals incorporating your cash flow position, your assets and liability scenario, possible contingencies and your goals. But, is the formulation of financial plan enough to ensure that you will realize your financial destiny? Not really. You must be aware of the following factors that can reduce the possibility of financial success.
These words of François de la Rochefoucauld beautifully explain why you need to review your financial plan regularly, at least once annually. You might ask “Why should I review my plan annually when everything is going to remain the same in coming year? I will not change my financial goals, retirement plans etc every year.” Well, you might not change your goals, but the economic environment changes constantly and you need to adapt to the changed scenario to make your financial goals a reality.
To make you understand the idea better, let’s take a few examples of changes that impact your financial planning.
Change in Income
Every annual raise in your income can be smartly employed and diverted to investments keeping the financial plan updated or be converted into expenses by tempted consumption. If you are regularly consulting your financial planner, he will advise you to channelize your increased income to either pay-off your liabilities (like home loan, car loan, etc.) or generate income by converting them into investments.
On the contrary, if you will keep following the un-reviewed financial plan blindly, you would most probably convert the incremental income into expenses and hence delay your financial freedom. The regular review of your financial plan is equally essential in case of a negative change in income like the pay-cuts that we all have recently witnessed during the slowdown.
Change in Taxation Norms
Taxation norms change almost every year and the same needs to be accounted for in your financial plan. For example, you can save extra tax beyond the usual Section 80C limits by investing in Infrastructure Bonds up to Rs. 20,000. Recently, the definition of Senior Citizen has been changed and a person can enjoy the benefit of enhanced exemption limit from the age of 60 years (rather than 65 years earlier).
Also, the rules related to gift tax have been tightened and many transactions which were exempted earlier are now taxable. Thus, you can see how important it is to annually review your financial plan and make adjustments according to the changes in taxation norms.
According to Tim Meakin Nottingham, “Financial planning is based on many assumptions, it is very critical to check the plan and review the performance of your portfolio regularly.”