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  • Writer's pictureAkshay Nayak

The Annual Health Checkup For Financial Plans

We are currently at the beginning of May, which means that we are still just stepping into the new financial year. This makes it an ideal time to check the health of our financial plans. All of us are well aware of the importance of rebalancing our investment portfolios regularly. But the broader financial plans that our portfolios are a part of seldom enjoy the same kind of attention. Yes, our financial plans and systems too must be monitored and evaluated at least once a year to make sure that they are moving us in the right direction and driving the kind of outcomes we expect of them.

But doing this involves a lot more effort than rebalancing an investment portfolio since our financial plans need to be checked for a number of facets. And each of these facets are closely connected to each other. So if anything is lacking with respect to any of these facets, it ends up affecting the efficacy of the entire financial plan. Therefore each facet must be checked on multiple fronts to ensure that they are healthy. But what exactly are the major facets of a financial plan? And how do we ensure that each of them are adequately healthy? These are the questions that I will attempt to answer today.

Any pragmatic financial plan is built around a robust risk management system. And that is the first facet of an effective financial plan. Having a robust risk management system in place involves us having to first ensure that we have an adequately sized emergency fund in place (6 to 24 months our worth of monthly expenses). After that, it is important that we make use of the free annual credit report available to us as per RBI regulations to keep a check on on our credit score. A credit score of 750 and above out of 900 is widely accepted to be a healthy credit score. The variables that affect our credit score are laid out in the graphic that follows.

Being aware of our risk profiles is also vitally important for each one of us. Therefore it would be prudent to generate a risk score at least once a year. There are a number of psychometric risk profiling tools available online which we can use to generate our risk score. Alternatively, those of us working with professional advisors can ask to get our risk profiles assessed annually. Finally we must ensure that we have adequate life and health insurance coverage over and above the coverage offered by our employers. For more on how much life and health insurance coverage is adequate have a look at my earlier pieces Once Your Time's Up, Then What? (Life Insurance) and Gun For Wealth, But Don't Forget Health (Health Insurance).

Having these measures in place would ensure that we are adequately insulated against most major risks we would face over the course of our lives and also ensure that the effects of any financial mistakes we may make are mitigated. The next major facet of our financial plans that must be evaluated is our investment plan and portfolio. Along with the obvious annual portfolio review, it is also important to ensure that the investment products we have chosen continue to be an ideal fit in light of our risk profiles and financial goals. Most importantly we must ensure that we have a clear plan in place to increase the amount of our monthly investments by at least 10% once a year.

Having lumpsum amounts over and above our regular investments ready for use in the event of a market correction or crash would be all the more advantageous. These measures would ensure that our investment plans allow us to continue our regular investments continue uninterrupted, while also leaving us capable of benefiting from adverse market conditions. Once our investments are in place, we must see to it that the ownership of our investments does not come into question. This is possible only through adequate and appropriate financial documentation.

And this is the final facet of an effective financial plan. For effective financial documentation we must remember that some financial documents need to be created from scratch, while others simply need to be collated and maintained. A list of documents to be created and collated are given with a few general guidelines in the graphic that follows.

Apart from creating and maintaining the documents listed above, we must also ensure that our personal details such as phone numbers, residential addresses and email IDs are correctly recorded and maintained by various institutions that we deal with such as banks, brokers, mutual fund houses and so on. Any changes to these details must be intimated to these parties immediately. We must also make sure that we have our nominations in place for all our investments. Finally we must also make sure that we have our PAN-Aadhaar linking in place for assets such as bank accounts, demat accounts and mutual fund folios.

Robust financial documentation would help ensure that outsiders cannot question the ownership of our assets or wrongly stake a claim to them. It also means our families are guaranteed smooth access and convenient use of our assets both during and after our time. I began today's piece by saying that now is a good time for us to evaluate the health of our financial plans. I had two reasons for saying that. Firstly, if we find that all facets of our financial plans are properly in place, it would give us the validation and the confidence that we have been doing the right thing and just need to continue with the same.

On the other hand if we find that a few things are out of place, we would have clear areas for improvement and the rest the financial year to sort things out. But regardless of whether or not our financial plans are healthy in the present moment, the key takeaway for anyone reading this should be to make the health check of their financial plans an annual ritual at the very least, ideally at this time of the year. That would give us the best chance of identifying loose ends in our financial plans and ensuring that we do not deviate too far away from the track we have set for ourselves.

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