The power of a regular review
You might be wondering if you need to bother reviewing your financial plan every year. After all, if we've already done the hard work of setting it up, why tinker with it? Here’s the simple truth: the world changes, life changes, and so must your financial plan. Skipping your annual financial review is a bit like ignoring an engine light on your car’s dashboard—it might not seem urgent until it's too late. Let's consider why these reviews are crucial and how they can keep you on track to achieving your financial goals.
The Ever-Changing Economic Landscape
The economic environment is anything but static. Interest rates fluctuate, inflation rates vary, and economic growth can stall or surge without much warning. These shifts can have a profound impact on your financial goals. For instance, a rise in interest rates might make it more expensive to borrow money, affecting your plans for buying a home or expanding your business. Conversely, a robust economic environment might mean your investments are performing well, potentially allowing you to reach your financial goals sooner than expected. Annual reviews help you adapt your financial strategy to these economic changes, ensuring that your plan remains effective and relevant.
Market Volatility and Investment Performance
The financial markets can be unpredictable and often do not perform in line with the assumptions made when we first crafted your plan. For example, if the stock market takes a downturn, the value of your investments might decrease, which could delay your retirement or other financial goals. On the other hand, a booming market could boost your investment portfolio, providing opportunities to invest in other areas or achieve your goals earlier. Regular reviews allow you to assess whether your current investment strategy is still appropriate or if adjustments are needed, such as rebalancing your portfolio to align with your original asset allocation or risk tolerance.
Changes in Your Risk Tolerance
Risk tolerance is not a constant—it evolves with your age, financial situation, and personal experiences. Early in your career, you might be more willing to take risks for higher returns. As you approach retirement, you might prefer preserving capital over seeking high returns. Regular financial reviews provide an opportunity to reassess your risk tolerance and ensure your investment choices reflect your current comfort level with risk. This adjustment helps safeguard your investments against unwanted risks and aligns your portfolio with your life stage.
Life’s Significant Events
Life is full of surprises and significant events that can alter your financial landscape. Major life changes such as marriage, the birth of a child, a career change, the changing fortunes in your own business or the onset of a health issue necessitate adjustments to your financial plans. For instance, the arrival of a new family member may increase your expenses or change your goals, such as saving for education. Similarly, a new job or a promotion might increase your income, allowing you to save more or pay off debt faster. An annual review ensures that your financial plan accommodates these changes, keeping your financial goals achievable despite life’s unpredictability.
Shifting Goals and Priorities
As you journey through life, your goals and priorities are bound to shift. Perhaps you initially set out with the headline objective of buying a first home or even a bigger house, but now you're more interested in acting on your creative idea and want to put any spare cash to use in starting a business. Or maybe you’ve achieved your goal of setting up a college fund for your children and now want to focus on retirement planning. Whatever the case, regular reviews give you a chance to realign your financial strategies with your evolving goals. This ensures that your financial resources are being directed toward what’s most important to you now, not what was important five or ten years ago.
Embracing regular financial reviews is about committing to the planning process, not just setting a plan and forgetting about it. This process involves ongoing adjustments and fine-tuning, which are essential for dealing with the complexities of financial management. A plan that is frequently reviewed and updated is more resilient and more likely to succeed because it adapts to new information and circumstances. Think of it as dynamic tuning for your financial engine, ensuring optimal performance no matter what lies on the road ahead.
In essence, an annual review is your opportunity to take control of your financial journey, regardless of the twists and turns of life and the economy. It’s about making proactive adjustments to ensure that your financial plan remains a true reflection of your current life situation, goals, and the economic landscape. By committing to this annual exercise, you ensure that your financial strategy is not just a static document but a living framework that grows and evolves with you. Remember, staying engaged with your financial plan through regular reviews is not just good practice - it’s essential for navigating the uncertainties of life and securing your financial future.