Home/Blogs/How to modify your financial plan as your priorities change

How to modify your financial plan as your priorities change

stock market
11 Feb 20206 mins readBy MOFSL

Financial planning is all about paving the road for realizing your dreams in the immediate and distant future. Financial planning begins with identifying your long term goals and then setting your financial priorities. Obviously your financial plan is built to adjust with the changing times but then there are certain triggers that will call for modifications to your financial plan. What are the financial planning tips to adjust to these triggers and how to adjust your financial plan accordingly..?

 

Shifting your plan with advancing age

This is the most obvious trigger to modify your financial plan. Your risk appetite reduces with age and responsibilities and that means there must be a negative relation between your age and your equity component. The equity component formula of (100 – age) may be scientifically unsophisticated but it conveys the message nevertheless. There are some sub-aspects to this age related adjustments. Your original financial plan is made with certain assumptions in mind. What if the interest rates are going down and therefore you need to save more to reach your annuity targets. That calls for either reducing your current expenses further or take a higher risk in equities.

 

Arrival of a new member in the family

When your bundle of joy arrives there is the need for setting your financial priorities all over again. Here is how to adjust your financial plan to accommodate the newborn. You obviously need to factor in the long term needs of the child’s education, future security and marriage. Thus it will call for a greater proportion of equity in the investment that you are tagging the newborn’s future needs. Also you need to expand your insurance cover as the term plan needs to cover multiple future needs.

 

Responsibility towards parents

This is something most of us have to take on at some point of time. Nowadays, parents are independent but beyond an age it behoves upon us to take greater care of our parents with a lot more personal attention. Obviously that calls for greater commitment in terms of regular fund outflows and in the form of health insurance for them. Your financial plan needs to be modified to provide for an expense allocation for their regular needs and a medical insurance for them is a must. Nowadays it is possible to get health covers up to the age of 80, albeit at a higher premium.

 

Special medical emergencies in the family

This is something that most of us do not anticipate. More often than not, your medical cover is good enough to take care of your routine medical needs. What about special circumstances? For example, a member of your family may have a chronic problem that will call for continuous outflows which are not covered by your medical insurance. You or your spouse may go through a prolonged medical condition which may lead to loss of earning power and therefore lower ability to save. At these times it is essential to be pragmatic. You need to consciously lower your long term return expectations. It may also be necessary to offload some of your investments to take care of the immediate present. Either you need to downsize your future need and reduce the accumulation accordingly or you need to cut your expenses on routine items further.

 

Setting up your own business

This is a step that a lot of middle-aged executives are taking nowadays. For people with a greater entrepreneurial drive, the dream is always to set up their own business. But that calls for huge sacrifices. You lose out on a regular income source. You may take on additional debt to cater to the needs of your business. You may find it hard to meet all your expenditure and EMI commitments. How should you modify your financial plan in these circumstances? Firstly, before you start your business, you need to rethink your financial plan. Put greater focus on repaying high cost loans if any. See, what will be the relatively-assured cash flows generated by you and your spouse put together. You need to plan your expenses at a lower level. Within the ambit of your long term goals prioritize. The most important change here is to de-leverage yourself as low debt will give you breathing space and also an exit route later on.

 

Sharp increase in inflation

This is something that most of us hope it does not happen, but is a distinct risk. Most of us plan our future based on certain assumption of inflation. Normally, the assumption of inflation is higher than the current rate. The problem is if the average inflation goes up by 400-500 basis points and the interest rates do not go up in tandem. That means you are left with a huge gap on the real value of your investments. There are 2 approaches. Firstly, look to focus more on inflation-indexed bonds and gold bonds which can give you positive returns post inflation. Secondly, shift your allocation more towards equities. Normally, equities tend to give better returns in times of inflation compared to debt.

 

The bottom-line is that there could be a series of events that could force a change in your financial plan. Obviously, the goal posts cannot be shifted. The focus should be on setting your financial priorities. What you can do is to try and make your goals realistic and review your personal balance sheet a little more tightly. That is a good starting point on how to adjust your financial plan.
 

Disclaimer: The stocks, companies, or financial instruments mentioned in this blog are for informational purposes only and should not be considered as investment recommendations. It is advised to consult with your financial advisor before making any investment decisions. Investment in securities markets are subject to market risks, read all the related documents carefully before investing. Investors are strongly encouraged to carefully read the risk disclosure documents prior to participating in market-related investments or trading activities. Due to the volatile nature of financial markets, no guarantees can be made regarding investment returns. Motilal Oswal Financial Services Ltd. does not offer any assured returns on market-linked securities. Please note that past performance of stocks or indices is not indicative of future results.
Open Demat Account
I wish to talk in South Indian language
By proceeding you’re agree to our T&C
Click here to see your activities