How often should I review my routine finances? Some suggest reviewing every six months to a year, every 2 to 5 years for long-term plans Image Credit: RODNAE Productions/Pexels

Dubai: Emergencies are not the only events that affect your financial plans, there are other unplanned events that can require you to modify your budgets.

For instance, let’s suppose you have a very good financial plan and are following it carefully. But what happens if you then get a job that pays you much more than you were earning before, you get an offer to go abroad or you take up a hobby that turns into a well-paying profession?

Following a financial plan is often likened by experts to maintaining a house or a car; you don’t wait till you have to undertake large scale repairs, you keep making small modifications from time to time so that it is always in good shape.

Emergencies are not the only events that affect your financial plans, there are other unplanned events that can require you to modify your budgets.

How do you know it’s time to review your finances?

Apart from reviewing your specific financial goals, here are three key financial metrics to evaluate to help you recognise whether it is time to review your finances:

1. Net worth:

If you could look at only one metric to evaluate your progress, it would be your net worth (assets - liabilities).

Our net worth reflects all of the financial decisions we've made throughout our lifetime. Think of it as your financial report card. The key is evaluate the change in your net worth over time.

How can your net worth go up? ​​​​​​​
Spend less than you make and your net worth goes up. You've saved the difference, used it to pay down debt or both. If you've spent more than you made, you've taken money out of savings, increased your debt, or both. Your net worth also reflects the performance of your investments.

2. Savings rate:

The savings rate is a measurement of the amount of money, expressed as a percentage or ratio, which a person deducts from their disposable personal income to set aside as a nest egg or for retirement.

There are two key aspects of savings that should be evaluated. First, consider whether your cash position is sufficient to handle all short term needs and unexpected emergencies. Second, consider whether you are getting the best interest rates available.

3. Debt levels:

The next step is to look at your debt and ask two questions. First, did your total debt go up or down over the past year?

Secondly, did you borrow money over the last 12 months? Some may have been able to reduce their overall debt, even though they borrowed more money during the year and then repaid it.

Your monthly or weekly budget should help keep you on track for the most part, but is that enough?

So, time to audit your finances?

While your monthly or weekly budget should help keep you on track for the most part, to truly evaluate your financial situation and make adjustments completing a thorough audit is the sure shot way to go.

There’s often complexity associated with the word audit, however, not all audits have to be. In fact, simply put, an audit is really just an in-depth investigation. You’ll look at all your expenses, one-time and ongoing, purchases, financial records, and any other money-related activity.

At its core, it’s a process that’ll illuminate any financial missteps or issues to help set your finances in the right direction.

What is a budget audit?
A budget audit examines whether the budgeting process is operating effectively. It is an evaluation of the budgeting effort and examines techniques, procedures, motivation, and budget effectiveness.

The budget audit considers patterns of expenses, past revisions made to budgets, how costs were analysed, identified and classified and if allowances set in the budget are adequate or needs to be modified.

Review of a financial plan

Changing your financial plan too often will be as bad as not having a financial plan at all. Then again, there is no ideal fixed period after which reviewing a plan can be recommended.

It is up to you to decide on how often to review the plan, financial planners opine. While some suggest doing it every six months or every year, others recommend that you do it every 2 years or every 5 years for long-term budgets.

The factors that will guide you regarding how often you should review your plan are:

1. Financial products: The type of financial products that you have invested in. If there are products that are maturing at short intervals, you may have to review your plan more often.

2. Financial targets: The types of goals that you have set is detrimental to how many times you audit your finances. If you have several goals, as each goal is achieved, you need to review your financial plan.

3. Personal factors: If the number or your dependents increases or decreases, you need to review your plan. If your income increases or decreases, you need to review your plan.

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What does reviewing your financial plan involve?

What does reviewing your financial plan involve?

Deciding if all the goals that you have set are still relevant, meaning have you lost interest in achieving any of them; would you like to add some fresh goals?

Deciding if the time frames that you set for the goals are still the same as you had previously decided, and are the financial instruments that you chose to meet your goals going as per plan?

This is more the case for investments in unpredictable investments like shares or equity mutual funds. In the case of fixed income investments, you know for how long you are investing and what you will get.

But in the case of shares, you may have expected them to do well and they don’t or they may out-perform your expectations. You need to see how these instruments are functioning as per your expectations.

Here’s an example. Let’s say according to an earlier financial plan you had hoped to buy a home in about 2 years, and you had been setting aside money and regularly depositing it in an investment product to meet the related expenses on the later date.

However, you decide to push the deadline by 3 years and wish to part of the money you saved up on a new car right now. This would involve dividing your investments in such a way you meet both the expenses, while factoring in how you can meet any shortfall. But how would you go about it?

The whole idea of reviewing your financial plan is to reconstruct it, if necessary.

Reconstructing the plan

The whole idea of reviewing your financial plan is to reconstruct it, if necessary. If you are not comfortable with your financial situation after review and you feel your financial plan is not taking you closer towards your goals, you need to modify it.

Modifying the plan involves:

Deleting goals that you have already achieved or do not wish to achieve anymore from your plan. It also involves adding fresh goals to it.

Changing the time frames that you set for the goals, if necessary. Alternatively, if nothing else is possible, you may have to lower the amount that you had originally planned to spend on your goal.

Investing and disinvesting in financial instruments if necessary.

Planning to retire at the age of 60? Here's what to do..
Suppose you have planned to retire at the age of 60 years. As per your financial plan, you had been investing in stocks and you had decided to gradually take money out of the stock market from the age of 55 years onwards and put it in fixed income instruments. This was just to ensure that your money would be safe there.

If you have reached the age of 53 years and are very convinced that the stock markets are going to be down for the next 5 years, you may start disinvesting (withdrawal or reduction of an investment) from stocks right away.

You may also feel that since interest rates are high at present, you can shift a bulk of the money that you have collected in shares into fixed deposits to benefit from safety and high interest income.

Key takeaway? Restructuring your financial plan is a crucial exercise. However, it should be undertaken only if the financial plan absolutely needs to be restructured. Unnecessary interference with the financial plan will spoil any long term results that a financial plan can deliver.