Oran Hall | Striking gold with your financial plan

We often count our medals long before the Olympics. Sometimes our athletes meet or exceed our expectations. Other times, they do not. The same happens with our personal financial plan, so it is important to monitor it.

There are many reasons why it is critical to monitor our personal financial plan. Ultimately, we want to be satisfied that it delivers the outcomes we expect, but there are many factors that can cause the best-laid plan to deliver underwhelming results. Among these are unrealistic goals, changes in the economy and financial markets, changes in our personal and financial situation, changes in the natural world, and poor execution due to limited knowledge and skill, and impatience.

Sports people generally gear up for action by preparing intensely. They recognise that it is necessary to be prepared physically and mentally. They seek to know about the conditions in which they will perform and plan how they will adjust if necessary. They devote much time to practice. After the event, they tend to look critically at how they executed their plan so that they can do better next time.

We monitor our financial plan to help us to keep it on track or to make meaningful changes that will make it more realistic or to align strategy with the nature and goals of the plan. One effective way to monitor the plan is doing reviews at pre-determined times such as at the end of each quarter, but an annual examination is worthwhile. Nonetheless, taking a look at our financial plan when unexpected serious events occur is in order.

Observing, checking, and reviewing our financial plan does not necessarily mean making changes to it. For example, if it is on track, there is hardly any need to make changes. If it is not on track, it may or may not be necessary to make changes. Some developments may be temporary and may be resolved in the short term, for example, and some may create new opportunities for the plan to deliver better results. Overall, chopping and changing is not ideal. The long-term goal is what should guide the management of the plan.

Many developments tend to be outside of our control. We do not, for example, control what the economy and the financial markets do. Inflation, interest rates, and the exchange rate affect us. Inflation increases how much is required to realise our goals as a weaker local currency increases costs. Higher interest rates do the same if we employ debt as a part of our strategy. They can also affect equity values negatively but cause income from interest-earning assets like bonds to increase. Ultimately, how our financial plan fares depends on the composition and performance of our investment portfolio.

Our personal situation includes the structure, size, and needs of our families, and these may change with time. People get married, they divorce, spouses die, they have children. The children pass through various stages, each stage requiring a different level of financial support, which costs more over time as inflation drives up prices.

When a breadwinner dies, the income of the family falls, with negative consequences for the family, although life insurance can close a portion of the financial gap. Monitoring a financial plan requires assessing the adequacy of life insurance for each important member of the family unit.

Our financial situation can change due to unemployment, new employment, business failure, disability, sickness, the level of investment returns, a large expenditure, and a significant loss – due to a natural disaster, for example. While the effects of some of these developments can be short term, they can still have significant negative consequences if there is not sufficient liquidity to fill the void.

Monitoring our financial plan can help us determine how well we can withstand changes in our financial situation, some of which can be brought about by changes in the economy and the financial markets. Others, on the other hand, can be brought about by our own doing due to inexperience, poor decision-making, and poor planning. Taking a serious look at our situation with professional help, if necessary, and educating ourselves on financial matters can be useful.

Sports people set goals and review their performance with their coach, team members, and trusted colleagues and make the changes deemed necessary next time even when they do well. They do all they can to keep fit and healthy to achieve performance.

We can do the same. We must create our financial plan with realistic goals. Monitoring it does not mean we must take action: it may not be necessary. But it may be necessary. In such a case, we must guard against being too conservative or too radical. Living in a world of uncertainties, we need to be aware of our circumstances and the world around us and be prepared to adapt so that our financial plan can deliver gold.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com