The beginning of every year is a fresh new start. The New Year gives you a chance to change, revise, modify, and correct past patterns and start new ones. The New Year is a good time to make amendments and start afresh. It is also a great time to take on new challenges, set renewed goals, and fix different targets.
Revisiting your past patterns and habits and bringing about some positive change can help you in several aspects of your life. Whether it is your personal life, professional life, or your financial plans, a revision can help you understand the flaws in your behavior and make alterations for a better future. When it comes to having a bright and abundant financial future, the importance of a solid financial plan cannot be stressed enough. A foolproof plan can ensure that you pay attention to all areas of concern. It also ensures that you stay focused on your goals and are able to adopt the best strategies to achieve them. Financial plans offer you a roadmap and streamline your affairs, carving out the fastest and most profitable route to reach your destination. This is why creating a financial plan is the very foundation of a secure financial future.
However, creating a financial plan is not enough. It is also important to revisit your financial plan every now and then. Given the economic turbulence of 2020 and 2021 post the outbreak of the coronavirus, revising your financial plan as you enter 2022 is critical. With a new government in power and the recovering markets, reexamining your financial plan can help you in various ways. Reach out to a professional financial advisor who can assess your current financial plan and suggest changes, if needed, to keep it in line with your future financial goals and objectives. Keep reading to know why you might need to revise your financial plan.
Why is it important to have and revisit your personal financial plan?
- It helps you monitor and account for a change in your income:
- It can ensure you manage and get rid of your debt efficiently:
- It helps you regularly check the credibility of your retirement plan:
- It helps account for changing relationships in your financial plans:
- It assists you in effectively rebalancing your investment portfolio:
- It can help ensure you stay both physically and financially healthy:
The New Year can surprise you with bonuses, increments, and sometimes even new jobs with a considerable salary hike. While you move up the ladder in your professional life, it is crucial to reflect these changes in your financial plan as well. If you have been recently promoted or if your income has increased, you can also increase your investments and savings in the same proportion. Altering your financial plan in tandem with your income or financial status ensures that you stay on the right track to financial freedom. It also ensures that your money works at the right pace and that you reach your goals sooner. The approach can also be followed if you have a side hustle and are earning extra money from a part-time job on the side. You can either increase your investment or savings percentage in the existing instruments or consider new instruments for your new goals. If you are investing in a company-sponsored retirement account like the 401(k) account, it can help to maximize your contributions. The latest contribution limits for a 401(k) in 2022 have been increased to $20,500 from $19,500 in 2021 for people below the age of 50. People aged 50 or above can contribute another extra $6,500 as a catch-up contribution, bringing the total limit up to $20,500 + $6,500 = $27,000. The employer may also match your contribution. Most companies contribute $1 for every $2 contributed by an employee. So, maximizing your contributions can help you reach your retirement corpus sooner. If you do not have an employer-sponsored account, you can invest in an Individual Retirement Account (IRA). The total contribution limit for an IRA in 2022 is $6,000. People over the age of 50 can also contribute an additional $1,000 as a catch-up contribution. Furthermore, it can be equally important to revisit your financial plan if you have lost your job or had a salary cut. If such a situation arises, you may want to check your emergency savings and ensure that you have enough money saved for a rainy day. In addition to this, you can also check your expenses and cut out any unnecessary and avoidable expenditure like credit card interest payments, magazine or OTT subscriptions, and more. You can also create a new budget that accommodates your new income. It may be advised to try and maintain your investments and savings as before, even if your income is lower now. Reducing your savings should ideally be the last option.
It is important to manage your debt efficiently to ensure that you do not fall into a debt trap. Consumer debt like credit card interest can be tackled with some mindfulness and prudence. Try to limit your use of a credit card if you see your debt piling up and are unable to pay it back on time. This can be done by creating a budget and ensuring that you spend within the limits of your income. Unless absolutely necessary, try to abstain from the urge of using your credit card. It can also help to use a low interest credit card and consolidate all your debt under one card. This makes the repayment process more manageable and eliminates the chances of errors or delays in payments. If you have higher value loans like a home loan or a car loan, try to stick to the repayment schedule and settle your loan repayments on time. At the same time, it can also help to support your loans with an investment that helps you offset the impact of debt. You can use the returns from your short-term investments to repay your debt or avoid taking a loan and instead invest your money and use the returns for your purchases. In addition to this, it also helps to monitor your credit score regularly, so you are well aware of where you stand. If you notice your credit score dropping, you can take appropriate measures to improve it right away. Lastly, if you have existing debt, avoid taking on more debt. Accumulating debt can also put you in a debt trap. It can also make it difficult to pay back all your dues in time. Therefore, a better way to manage your debt would be to create a solid financial plan that prioritizes your goals as well as timely repayment of debt, so you can take heedful decisions at all times. Purchases made on an impulse can be avoided if you pay attention to what is truly important.
Post-Covid-19, there have been two schools of thought. The first believes in working more and saving more money to tackle any other similar situation in the future. A lot of people were caught off guard when coronavirus first emerged in early 2020. This has led to an increased awareness about the importance of being financially free and secure at all times. However, the second school of thought has a different opinion. Some people believe that with no certainty of life, it may be better to retire early and enjoy a relaxed life instead of working till the age of 60 or more. Irrespective of which of these ideas you resonate with, you have to ensure that your retirement plan aligns with your ideas. If you wish to retire early, you may have to save at a higher rate than your peers. You may also have to invest more aggressively than others your age. Since the investment horizon is smaller for early retirement, it is crucial to maximize your savings and restrict your expenses. This can translate to a frugal lifestyle but can help you retire early. A heavy concentration in stocks may help you reach your target amount sooner, but this can also entail high risk. The New Year can be your cue to determine how you expect your future to be and accordingly change your retirement strategy. If you wish to retire at the official retirement age or work well into your 70s and beyond, you can continue saving at the same rate as before. If you have stalled from your progress because of the market turbulence of the last two years, you may even be able to gain some extra time to reach your retirement corpus target if you plan to retire late.
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If you have been recently married, you may want to include your spouse in your financial plan. This can involve your retirement plan as well as your estate plan. Moreover, if you want to file your taxes jointly as a married couple, a change in your marital status also affects your tax planning. The same logic can be applied if you have been divorced or widowed recently. A change in your marital status can affect your lifestyle, day to day expenses, household income, as well as future goals and needs. In cases of alimony, it can also impact your assets and net worth, along with your future finances, depending on how long you pay the alimony. Therefore, it is important to account for these changes to ensure that you have a solid financial plan. It is also necessary to update the names of beneficiaries on your will, trusts, savings accounts, life insurance plans, mutual fund schemes, 401(k) and IRA, among several other similar accounts. If your beneficiary is an ex-spouse, there may be legal hassles at a later stage at the time of your estate distribution. Similarly, if you have children (biological and adopted), you may want to add them as beneficiaries on your estate. If you remarry and have step-children, you would again have to consider the involvement of your step-family in your estate. All of these things must echo in your financial plan.
It is crucial to rebalance your investment portfolio to ensure that your investments are streamlined to your financial goals and risk appetite. Rebalancing refers to bringing your asset allocation back to what it was and ensuring that it meets your current goals. So, your original asset allocation could be 60% equity and 40% debt. However, if your stocks perform well, this can change to 70% stocks. Portfolio rebalancing can help you bring the composition back to the original values by buying some bonds and selling some stocks.
With age, your goals, risk capacity, income, investment budget, etc., may also change. In fact, as per the standard rule of asset allocation, your asset allocation varies with age. This rule suggests that to calculate your share of equity and debt investments, you should subtract your age from 100. For example, if you are 40 years old, you can have 100 - 40 = 60% investment in equity and the remaining in debt and cash. If you are 50, you may want to reduce this to 50%, and so on. As you age and move closer to retirement, your risk appetite drops. Investing in high risk options like equity can be problematic close to retirement as you risk losing your money or incurring a significant loss that can be hard to override in such a short span. Therefore, as you age, you may have to focus more on capital preservation than capital appreciation. The New Year can be the perfect time to revisit your existing financial plan and make any changes as needed.
If you are still unsure of why you might need to revise your financial plan, the most straightforward answer can be to ensure good health. A solid financial plan helps you prepare for all contingencies. This can include financial emergencies, health concerns, personal and professional commitments and more. This New Year, make sure that you have adequate insurance for unexpected times. Besides, ensure that your financial plan is on point with your expectations and requirements. The peace of mind that comes from knowing that you are on the right track will help you live stress-free.
To summarize
The New Year celebrations and parties end soon enough, but the long-term planning stays behind and offers you a path forward. So, take some time to study your financial plan and make any desired alterations. This will help you achieve your goals in time and eliminate any obstacles along the way. In addition to this, revisiting your financial plan in 2022 can also help you incorporate the latest approaches and make the most of new-age investments. If you need help understanding how you can re-examine your plan or how to integrate the changes in your portfolio, you can contact a financial advisor in your area.
To get in touch with a fiduciary advisor who may help you revisit your financial plan in 2022 to ensure that you’re on track for achieving your financial goals and objectives, use the free advisor match service. Based on your requirements, the platform scans through registered and qualified advisors to match you with an advisor suited to your financial needs and goals.
For additional advice on how to grow and manage your finances for the year ahead based on your unique 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.