How Often Should You Review and Update Your Financial Plan?

A financial plan is a document that contains your financial goals, strategies to achieve those financial goals, your current financial situation, debt liabilities, and more. All in all, it serves as a guide to financial freedom. You can create a financial plan as early as in your 20s or when you first start working and have a steady flow of income. However, creating a financial plan is only half the job done. It is also essential to go back to your plan and modify it when time demands.

A financial plan is supposed to reflect your wants and needs. And since your wants and needs can never be the same, your financial plans need to be updated from time to time. In addition to this, the variables surrounding your financial plans also tend to change. For instance, the market forces are bound to fluctuate every now and then. Economic cycles are also continuously altering. Your income will not likely remain the same either. You may earn more or less depending on several factors, such as experience, age, skills, etc. So, a periodic review of your financial plan is advised. You may reach out to a professional financial advisor who can assist in carrying out a periodic review of your financial plan.

Given the hectic schedules of today and the race against time, it can be hard to revisit your investment portfolio regularly. Nevertheless, there are some situations where reviewing your portfolio and the financial plan becomes imperative. Keep reading to find out more.

How often should you review and update your financial plan? 

Here are some situations where you can consider reviewing and updating your financial plan:

1. When you get married:

Getting married can have a bigger financial impact on you than you can foresee. The apparent changes like dual incomes, more financial liquidity, and a better standard of living are what most people concentrate on. However, getting married has several other effects on your finances. Firstly, your tax liabilities can change. When you are married, you can file your taxes under the 'married filing jointly' category or the 'married filing separately' category. If you file your taxes jointly, you may be able to get better tax breaks. You can get several tax credits like the earned income tax credit, child and dependent care tax credit, American opportunity and lifetime learning education tax credits, etc. It is important to note that the method you choose will determine how much you are able to save in tax per year. Based on this, you could have higher or lower savings, which in turn could affect your investment budget.

Getting married can also impact your household expenditure. If your spouse spends more than you or has a more luxurious lifestyle, you could have fewer savings than you did before. This can again impact your investment budget and the type of investments you can add to your portfolio. Your combined risk appetite increases if both spouses are young and earning well. Contrarily, if your spouse is older, nearing retirement, or not earning as well, you may want to follow a more stable or low-risk investment approach. Another thing to focus on is debt. Do you or your spouse carry high debt? If yes, you may want to focus on paying off your high-interest debt before you maximize your investments. So, when you get married, go through your investment portfolio and style and align your investments accordingly.  

2. When there is a change in your job:

Effective financial plans should reflect the changes in your income. An increase or decrease in your salary can alter your risk appetite and choice of investments. It can also dictate your investment budget. For instance, if you are in a high position and drawing a steady income, you may be more at ease experimenting with high-risk investment options, such as direct equity. However, if your salary is lowered due to a recession, you may want to move your money to relatively safer options. For instance, you may consider equity mutual funds instead of direct equity. You may also like to transfer some money to liquid accounts to be prepared in the case of a complete loss of a job. A change of job can also be an excellent time to review your financial plan as your 401k contributions may alter. If your new employer offers you a higher match, you may also want to maximize your contributions. For 2022, you can contribute up to $20,500 per annum if you are below 50. With the employer match, you can contribute a total of $61,000 below the age of 50. The contribution limits for those aged 50 or older are increased to $27,000 individually and $67,500 for employer + employee contributions. This is a significant amount of money. If you receive such an employer contribution, it may be in your favor to contribute more to your 401k and make the most of these high figures for as long as possible.

3. When you have children:

The expenses of a family considerably increase when there is a new member on the way. Starting from healthcare to education, a child needs adequate funds throughout life. This may call for some adjustments to your financial plan. A financial planning review at this time can help you understand your child's financial requirements properly. Based on your findings, you may have to move your money around. For instance, if you had a travel fund before having a child, you may have to convert it into an education fund for your child. Most parents add a 529 education savings plan to save for their child's future education expenses. 529 accounts are tax-advantaged, state-sponsored plans that can be used to cover the costs of college education, K 12, as well as apprenticeship programs.

In addition to this, having a child also requires modifications to other components of a financial plan, such as your estate plan, insurance, and more. If you have not yet made a will, creating one becomes critical when you have children. Make sure to distribute your assets among your children after careful evaluation. In the case of minors, trusts can also be very helpful. Trusts offer you considerable power in relation to how your money is used or spent in your absence. You may also want to invest in insurance. If you have a health insurance plan, you can add your children to it. You can also get a new health plan for them. Additionally, you can consider buying life insurance to protect your children after you. 

4. When you have a specific goal in mind:

Every goal is unique and requires a different approach. Usually, most people create a generalized financial plan to chase after goals like retirement, house purchase, emergency needs, etc. However, there may be times in life when some of these goals may be more important than others. For example, if your present concern is high-interest debt, your focus can be on eliminating debt and not buying a house. Likewise, if you are retiring in five years, your focus can be to ensure sufficient retirement funds rather than saving adequate funds to travel in retirement. Financial plans need to be updated to incorporate a pending need. So, if you have a child ready for college in the next five years, you may want to focus on your 529 savings. In this regard, you may have to contribute more to this account. You may also ask the child's grandparents to contribute to it.

Additionally, you can cut down on other contributions and expenses for the duration to concentrate on a singular goal. So, if the goal is to put a child through college, you can increase your 529 contributions. You can also increase your Individual Retirement Account (IRA) contributions, as IRA funds can be used for qualified expenses, such as education. Besides, you may want to improve your credit score, too. If you have to take a student loan along with your child, your credit score will help you in getting a good interest rate.

These changes in a financial plan may be short-lived until you achieve your goal. However, making them at the right moment is essential.

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5. When getting a divorce:

Just as you may combine several aspects of your finances with your spouse when you get married, a divorce is a time when all or most of your joint finances would require sorting out. Divorce or separation not only brings about changes like splitting savings accounts or filing your taxes separately. You may also incur additional expenses, such as lawyer fees, alimony, child support, etc. If you are going through a divorce, you would have to change the beneficiaries of your accounts, such as the 401k, IRA, and also insurance plans. If you have spousal insurance cover, you may have to get a new insurance plan for yourself. Your estate plan would also need to be revised, as you may want to remove your ex-spouse from any distributions. You may also want to change beneficiaries, such as your children or your spouse's children. Your tax projections would alter as well, and so would your monthly budget.

A divorce can be messy sometimes. So, getting professional assistance in the matter may be recommended. You can consider hiring a financial advisor. Financial advisor reviews and general guidance can be valuable at such a time. An advisor can help you split your finances, plan your life and future financial goals individually, and sort out the legal hassles if any.

6. When inheriting money:

Inheritance from a parent, grandparent, or relative can boost your financial health. However, this can only be true if you use your inheritance prudently. The way you use your inheritance can be decided on the basis of your immediate needs and goals. For instance, if you have a lot of debt, it may be wise to use the inherited money to pay off your loans. If you do not have any debt, you may invest the money for future goals, such as buying a house. In addition to this, it is crucial to understand the tax implications of your inheritance, too. Estates worth $12.06 million or more are levied with a federal tax. Some states may also charge an inheritance tax. The type of assets you inherit also determines your future financial plan or strategies. For example, if you inherit a traditional IRA, you would be liable to pay tax on your withdrawals, just like the account's original owner. However, if you inherit a Roth IRA, you would not pay any tax on it. Likewise, tax rules may also differ for spouses and children.

It may be advised to consult with a professional financial advisor. Inheritances, especially large ones, can be challenging to handle. The legal stipulations and tax provisions can be hard to understand. So, instead of losing money to poor decisions, it may be better to hire an expert. 

7. Once a year: 

A financial planning review is not always necessary when you have a significant life event or goal. It is also vital when things may seem mundane. Typically, financial advisors recommend reviewing your portfolio and plan every few months to once a year. This can automatically help you take cognizance of changing incomes, economic cycles, goals, life stages, and more. Moreover, this can be a good practice or habit to follow. Many a time, you may be occupied with life to note the changes mentioned above from a financial standpoint. However, if you make it a point to review your portfolio every year or go through your financial plan periodically, you can proactively make the required changes and be up to date all the time.

To conclude

There is no precise answer to how often you should review your financial plan. Typically, it should be as often as your life or circumstances demands it. If you frequently change your jobs and earn different incomes from each, you may need to do it more often. You may have to do it if you have been married, divorced, widowed, or separated lately. Likewise, if you have had children, received an inheritance, etc., you would benefit from taking a look at your finances. It can also help to revisit your financial plan every six months to a year as a precautionary method.

However, what is more important is to do this activity under professional guidance from a financial advisor. An advisor can help you make the right changes to your plan that offer future long-term benefits and financial security. Use the free advisor match service to match with 1-3 advisors suited to meet your financial requirements.

For additional information on retirement planning strategies that can be tailored to your specific financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.