Time for course correction

You may not change your personal goals,but the economic environment changes. I replied. One has to adapt to this changed environment to make ones goals a reality.

To make him understand what I said a little better,I cited a few examples.

Salary increment

Gopal,43,and his colleague received a large increment in their salary. Within three years his colleague had paid off his home loan and purchased a new car. Gopal was surprised. His colleague told him that he had altered his financial plan the year they had received the increment. By investing the whole increment wisely,he had been able to pay off the loan and buy the car. Gopal realised that he was still following his three-year old financial plan. The extra income had been spent on items of conspicuous consumption. As a result he was unable to capitalise on his increment. He had lost out because he had not reviewed his financial plan.

Salims case was exactly the opposite of Gopals.

Job loss

Salim,42,lost his job two year ago. Due to the ongoing recession,it took him four months to get a new job. Fortunately,his financial plan had provision for an emergency fund that could take care of six months of living expenses. Due to this Salim did not face any financial stress at the time of his job loss. His insurance and investment schemes continued uninterrupted. He was happy when he got a new job at a similar remuneration.

Unfortunately,within a year of taking up his new job he lost his parents. He now had to return to his native place to get the farm land and other property transferred to his name. Salims employer was kind enough to grant him a three-month sabbatical,but without pay. However,after two months Salims funds were exhausted. He had not reviewed his financial plan the previous year. Hence the depleted emergency fund had remained unreplenished. He now faced a liquidity crunch and had to borrow from his relatives.

The story of the wealthy old man,Sardar Avindar Amar Singh,is also interesting.

Changes in taxation norms

The Sardar,77,had no grandchildren. But he was very fond of his friends grandson. Out of affection for the young man,he wanted to gift him something on the latters birthday every year. He,therefore,made a financial plan to gift his friends grandson Rs 1 lakh worth of shares every year. This amount was tax-free till 2009. But the recent Budget changed the taxation laws. If he were to continue his practice of gifting money to his friends grandson,this amount would be taxed as income in 2010. They would,therefore,lose Rs 30,000 per annum. Being wise Singh always had his plan reviewed. He now knew that such gifts are not tax efficient and decided to alter his strategy.

Taxation changes occur in almost every Budget and have to be accounted for in your financial plan.

Interest-rate changes

The grandson,Sandeep,28,faced a different problem. A little over a year-and-a-half ago,his bank had increased Sandeeps home loans equated monthly instalments EMI. This was due to a rise in interest rates in the economy in general. Sandeeps income had remained unchanged. He was shocked to suddenly receive a letter from his equity mutual fund stating that his systematic investment plan SIP had been terminated due to paucity of funds in his bank account. He had forgotten to review his plan at the year-end. As a result the higher EMI had ended up depleting the small reserve in his bank account. This caused the SIP to get terminated. Sandeep had to review his entire plan and make provision for the increased EMI and the SIP amount.

Amit had been listening intently all this while.

He understood the need to review the plan at the end of each year.

Review your investments

Besides the above-mentioned developments,one must also take into account changes expected to occur the following year. These could include an increase in expenses that could be incurred on childrens tuition classes,vacations,purchase or repair of cars,home renovation,and so on.

Investments also need to be reviewed periodically. If a Public Provident Fund PPF account is going to mature during the year then a decision to continue or not must be taken. Similar decisions need to be taken for other maturing investments such as Post Office schemes. Equity investments must be reviewed since some stocks or mutual funds may no longer have promising fundamentals. Not doing so will cause sub-optimal use of your funds,or worse still,land you in a state of financial distress.

Amit agreed to have his plan reviewed every year-end. He smiled and left.

The author,a certified financial planner,is the chief executive of Sardesai Finance. ceosardesai.com