What to Keep in Mind While Building Your Financial Plan

Photograph by Vinod Venkapalli

Financial wellness — which means ensuring that your finances are in line with your financial circumstances and behaviour — is crucial to our welfare, and it deserves regular attention and monitoring. Without thorough planning, we may find ourselves without the tools to tackle or avoid financial stress, anxiety, and hardship. It’s also essential to regularly check in on our finances to make sure that we’re on track for achieving our goals.

One way to go about this is through holistic financial planning — an approach that takes into account all aspects of your financial life, including your income, expenses, liabilities, investments, and insurance, as well as your psychological disposition and behaviour when it comes to money. When you have a broader view of your financial situation, you’re better equipped to make informed decisions. 

Conventional financial planning tends to focus primarily on investing, and often fails to consider how the psychology and traits of an individual manifest in the way they manage money. But this exercise should go beyond just investing, to also help you manage cash flows and adjust your plan to what works best for you, in line with what you want to achieve. For instance, you might have low tolerance for the anxiety that often accompanies taking risks with money. A holistic financial plan would consider this in every aspect of your finances — be it investing in certain asset classes, taking on a loan, or purchasing insurance.

Prudent investing is essential, but it cannot guarantee that you won’t face hurdles like liquidity issues, credit problems or a spike in inflation. To mitigate these risks, you ought to take stock of the other components of your finances, identify any patterns or biases in your behaviour, and review your financial status. Doing this on a quarterly basis is usually recommended, but a three-month interval is often not long enough to take into account major life-changing events like an illness or injury, job loss, windfalls, or a death in the family. To observe how these events affect your finances, an annual financial review would be of more help. 

So how often should you check your finances when following a holistic financial plan? As with most other questions on dealing with money, there’s no one-size-fits-all answer here. It would depend on your financial goals, lifestyle, and circumstances. Planning according to your current stage of life, your personality traits, and the prevailing economic environment is crucial. During your annual review, you should get a grasp of your income, expenses, savings, liabilities, insurance and investments to gauge how far you’ve come. 

Some aspects of your finances may require more frequent monitoring than others. For example, if you have risky investments in equity that you’re managing by yourself, you should monitor their performance monthly, while investments being managed by professionals — like a mutual fund manager — can be reviewed on a quarterly basis. For real estate, you can take stock as and when you update your investment — and adjust your strategy as needed. Likewise, a monthly review of your liabilities and expenses gives you a better understanding of your financial position. 

If you don’t feel equipped to understand and evaluate each of these aspects on your own, having a financial advisor to consult with can help you bring in an unbiased perspective to craft a comprehensive plan. Ultimately, holistic financial planning lets you take a step back and get a bird’s-eye view of where you stand financially. While you don’t have to be obsessive about tracking your money, taking stock every now and then can help you get a clear and complete picture of your financial wellness.