Your financial plan is your game plan to achieve your long term financial goals like retirement, child’s education, child’s marriage, home loan margin etc. Your financial plan needs to accommodate equity, debt, liquidity and insurance to ensure that the plan is as fool-proof as possible. Above all, your financial plan has to be flexible; that means it must adaptable to changes when warranted. Why is it important to have a flexible financial plan. What are the characteristics of a flexible financial plan? Here are 10 questions that you must answer while developing a flexible financial plan..
1. Does it account for change in income levels?
Normally, the financial plan uses the SIP route to reach financial goals. The drawback with most financial plans is that they assume constant SIP outflows. But, your income does not remain constant over time. In fact, your income normally follows an upward trajectory and therefore your financial plan should be able to enhance SIPs with higher incomes. A stepped-up SIP could be one way of taking care of this point.
2. Does it account for changes in life style?
Our retirement goals are normally determined by inflating our current costs at an acceptable rate of inflation. However, our life style does not remain the same with higher income levels. For example, we may spend more on holidays or clothes or even on eating out. All these have financial implications. Your financial plan must be flexible to adapt to the higher monthly requirements in the future and build it in.
3. How will the plan handle major economic disruptions?
We have seen major economic disruptions like economic liberalization, shifts in interest rate trajectory and shifts in inflation trajectory. Apart from their monetary implications, they also impact the value of your long term goals. Ensure that your plan is flexible enough to incorporate these major economic shifts without losing sight of your goals.
4. Is the plan inflation efficient?
We spoke about inflation shifts in the previous point. But, inflation works both ways. When inflation goes up it changes your future fund requirements and also reduces the present value of your future investments. Your plan must be capable of handling both these situations without impacting your financial goals.
5. Has the plan provided for the peripheral risks
Peripheral risks arise in a variety of ways. You need health insurance to ensure that medical emergencies do not become a crisis. Your loans need to be insured so that your assets are not impacted. Above all, your physical assets need to be insured so that repairs do not impact your cash flows and your commitment to your long term goals.
6. Can it accommodate goal changes and goal shifts
Why do goals change and why do goals shift? At a simple level, your goal milestones may change. You can have an addition to your family and that means your plan needs to accommodate two sets of goals. Alternatively, your parents may come to depend on you for financial support and you need to stand up for them. All these factors need to be accommodated into your long term financial plan.
7. Does the plan have a rule-based auto monitoring system
Every financial plan must have an in-built auto monitoring system. For example, shift in allocation between equity and debt must not only be age based or goal based but also asset class return based. At what point do you decide to go overweight on an asset class or underweight on an asset class? These are important questions that your plan needs to answer and also have to be on auto mode.
8. Does the plan encourage a continuous feedback loop
Your financial plan is not just about reaching financial goals but it must have an in-built forewarning system. Is your financial plan able to tell you in advance if your plan is not moving towards the target? How does the plan automatically tell you to take corrective action? A robust feedback loop can overcome most of these problems and make your financial plan absolutely flexible and meaningful.
9. Can it accommodate changes in tax implications
Tax rules keep changing and that can have a major impact on your financial goals. In Budget 2018, the government introduced 10% tax on long term capital gains on equity funds. Over a 15 year period, nearly 80% of your wealth creation will come from capital gains and so a 10% tax wipes out 8% from your final wealth. That means you need to enhance your SIP amounts accordingly. Your financial plan needs to be flexible enough for that.
10. How is it equipped to handle individual setbacks?
This is a slightly more delicate and personal side of financial planning flexibility. For example, you create a financial plan for the long term assuming that everything will be fine over the next 20 years. But, that may not be the case. You could lose your job and that will impact your cash flows. Alternatively, you may choose to give up your job and start a business on your own. If your business faces the initial 5-year blues, then it can seriously impact your financial plan. Here again, your plan needs to be flexible enough to accommodate for these kinds of drastic changes in your life.
Flexibility of your financial plan ensures its sustainability. That is why it becomes so critical!