Conducting financial reviews are an essential component of good financial planning. Here's why

Important financial reviews and when to conduct them

Irrespective of what your situation is – whether you are just starting a family, buying a new home, saving for your children’s higher education, saving for your own retirement – periodic financial reviews are critical for your financial well being. 

This is, of course, assuming you have set financial goals for yourself. These could include buying a car by the time you are 26 and an apartment by 30. These goals can be a great motivator for you to save more and be more efficient with your spending

Why Review?

Financial reviews help you take stock of where you stand financially, which in turn helps you make course corrections in personal money management. This exercise enables you to revisit your savings goals, keep a tab on your investments, correct your tax strategies, and encourages you to make adjustments to the different financial affairs to ensure that they are in order.

Everyone gains from it – women as much as men. In most families, decisions about household purchases are taken by the woman. So why should she not be involved in her own, or the family’s, larger financial affairs? These financial decisions could include taking an informed decision on which bank housing loan fits your requirements the most, or which health insurance works best for your family.

The question is not why you should do financial reviews, but how frequently they should be conducted. Should it be once a year, twice a year, or maybe more? What are the areas that ought to be reviewed?

Ideally, you should do it annually, quarterly, and even monthly. The focus areas will be different for each. Let us study this in more detail:

Monthly Reviews

The monthly reviews should focus on checking the progress that you are making on the savings and income front. Thus, personal budgets come into play, as does monitoring of your investments closely. This is microanalysis, as opposed to the annual review, which is macro.

  • Family/Personal Budget

An important component of the monthly financial review should be analysing the expenses of the previous month or stock-taking of the monthly budget. Unfortunately, budgeting is often viewed as restrictions on fun activities like shopping, eating out at restaurants, or a weekend getaway with family and friends. But a budget is more than that. It is simply a way to see how much money is coming in every month, and how those funds are being spent. It is one of the most basic and important tools which can enable you to build savings and a successful financial future. 

If you follow a budgeting ratio of how much you spend under various heads from your income and be disciplined about it, you will never go broke. In fact, you can work towards a retirement corpus. In a budgeting ratio, you break down your take-home pay to a 20-30-50 ratio under different heads, and while reviewing, you can see where you have overspent:

  • 20% saved (goals or retirement)
  • 30% on housing (maximum amount; this is for rent or home loan EMIs)
  • 50% on everything else, including utilities and paying off personal debts

You can set your own budgeting ratio according to your personal needs. After monitoring your inflow and outgo for a month or two, you will be able to identify areas that need adjusting in case your initial estimates were off. Make adjustments, but always balance inflows with outflows.

This approach helps you save at least 20% of your income and sets you down the road to financial stability.

  • Stock Investments

If you are into investing, then you should invest a little amount in the capital market on a monthly basis, instead of investing a lump sum. This way, you will spread your risk. 

For that, you have to track the performances of the companies whose shares you hold, preferably on a monthly basis, and try to follow the various aspects of the business like competitive advantage, financial soundness, quality of management and competition. 

The main aim of the monthly stock review would be to ascertain the financial soundness of your investment in those companies. You can base your reviews on four parameters, explained below:

  • Return on Equity (RoE): This tells you how much your company earns on shareholders’ equity; the RoE holds true for all industries and companies.
  • Debt-Equity Ratio (DE ratio): Expressed in numbers and percentages, the DE ratio indicates how much a company’s owners and shareholders/lenders have invested. This is particularly useful to analyse the performance of capital intensive industries like capital goods, metals, oil and gas etc.
  • Earnings per Share (EPS): This is what investors look for at all times. It reflects the profit portion that the company is allocating to each outstanding share. You must compare the EPS with past performance and that of other similar companies in the same industry.
  • Price-to-Earning (P/E) Ratio: This can be calculated by dividing the Current Share Price with the EPS. It tells you the price which the investors are willing to pay for the share depending on the current earnings. The P/E ratio also indicates the number of years that will be required to get back the initial invested capital by way of returns. Thus, the lower the ratio, the better it is for you.  Ideally, this ratio is suitable to analyse the performance of FMCG, pharma and tech companies.

In case you have a financial advisor, you can seek his or her feedback on your investment on these parameters. Keeping track of your stock movements and the companies you have invested in on a regular basis, will prepare you for any sharp rise or fall in the share prices in the future.

Related: A 9-Point Guide to achieving long-term financial goals 

Quarterly Reviews

The quarterly part of your financial review is a very important cog in the exercise, as it allows you to check what progress you have made towards meeting your goals over a three-month period. You can then set course corrections, and even new goals to develop your financial plan. 

Quarterly reviews also ensure that your debts and losses, if any, do not balloon to an impossible level and can be corrected after a limited time span. 

  • Credit Report

You can start with your credit report and score. After all, a good score improves your credit history and can make it easier to obtain loans, at favourable interest rates, when you need to borrow. On the other hand, a bad score indicates you are being tardy about clearing your dues, and points to mounting debts.

Take the time to look at your credit reports from the major credit bureaus if possible. See that your personal information is accurate and up-to-date, review the balance and payment history for each account, and check for negative remarks. If you spot an error or inaccuracy, you should contact the concerned credit bureau. 

There are six major SEBI-registered credit bureaus in India:

  • CIBIL, or TransUnion Credit Information Bureau (India) Ltd;
  • CRISIL, or Credit Rating Information Services of India Ltd;
  • Equifax;
  • ICRA (formerly the Investment Information and Credit Rating Agency of India Ltd);
  • CRIF High Mark, and
  • Experian.

A review of multiple such reports can help since the various bureaus may not always include the same information in their analyses.

  • Debt-Income Review

Reviewing your credit scores leads to the next item on the checklist - your dues. If your debts are getting fatter, clearly your current debt repayment plan is not working. Ask yourself - is there something wrong with your monthly budget reviews? Are the steps you are taking keeping you on track to square off your debts by the target deadline?

Look for expenses that have increased or decreased. If you believe you have reduced expenses, you should be in a position to increase your monthly debt payments to clear your balance faster. Yet, if your total dues show no signs of going down, there is something wrong. 

If your income has stayed static while the outgoings have shot up, you must review your spending to see which expenses can be pruned.

  • Stock Review

You may be wondering if monthly monitoring of investments is advised, why go for a separate quarterly one as well?

Well, this is necessary because a macro look at your investment helps you pinpoint areas where you may be going wrong, and those where you are on the right track. 

For instance, say the market is volatile at some point in time, and your investments witness massive fluctuations, forcing you to make quick decisions that month. A quarterly review will ensure that your asset allocation is maintained and that the temporary hitch does not derail you.

You should also review fees every quarter; higher fees can dent your returns. In the fourth quarter, think of harvesting your losses; it is the practice of selling loss-making security, which enables investors to offset taxes on both gains and income. The sold security is replaced by a similar one, which will ensure that acceptable asset allocation and returns are maintained.

Related: Financial planning for beginners: A 7 step guide 

Annual Reviews

This brings us to the annual financial review. This yearly exercise provides the ideal opportunity to assess the progress you made towards reaching your goals. You may even alter those goals over the years or tweak your strategies for the coming year. 

Audit your year-long housekeeping to identify leaks and plan plugs. Ideally, you should align your investments with goals such as retirement funds, children’s education, home purchase, and vehicle purchase. This review will look at the progress you have made towards achieving such goals.

Apart from this, some areas are too long-term or broader in scope to be reviewed monthly or even quarterly. These, you can re-evaluate in your annual review. Let us look at those:

  • Tax Savings

This is the first area that you should look at while doing the annual review of your financial affairs, and also draw the template of the coming year’s strategy.

There are many ways to beat the taxman. Figure out how to exhaust the Section 80C limit. You could take the help of a financial advisor here to ensure these tax-saving investments align with your goals.

You probably already have a few tax-saving expenses such as insurance premiums, children’s tuition fees, EPF contribution, and home loan repayments and rents. Add up the outgoings. If this is covering the tax concession limit of Rs 2.5 lakh (Rs 3 lakh if you are between 60-80 years old, and Rs 5 lakh if 80+), there is no need to invest any more in tax saving schemes. If not, the difference has to be invested. 

When reviewing, see if your specific tax-saving investments are based on your goals and risk profile. ELSS funds, PPF, NPS and fixed deposits are some of the popular options.

It is best to begin investing in the first quarter of the financial year so that you can spread the investments over the year. For this reason, it is advisable to finalise your tax saving plans for the year during the annual review of the previous year.

  • Insurance

For most people, insurance is seen as something that continues forever once bought. They forget it is an investment strategy and therefore needs to be reviewed at least once a year. 

It is a mistake not to review it annually considering that there are constant changes taking place in an individual’s personal life. For example, your health plan need not cover your children once they start earning and can acquire health plans of their own. Once the coverage shrinks, so does your annual premium.

Your life insurance premium also needs to be reviewed annually. The amount for a term plan under a new contract could be lower than that payable under the old one taken several years ago. Admittedly, insurance premiums tend to rise as you grow older, but you could still end up making a saving by moving to a new plan because of the overall fall in term premiums.

Consequently, you could get more coverage at the same premium amount, or the same coverage at a lower rate. But all this can happen only if you review your insurance policy periodically.

  • Retirement Corpus

When you review your tax-saving investments, you will also be looking at your investments for long-term goals. You can take steps like rebalancing your portfolio as you get closer to your retirement age, transferring your money from equity funds to less volatile debt funds.

A retirement plan has become a key facet of financial planning today because of two reasons; rising costs, and increasing levels of job uncertainties. Retirement planning is an area that you should start taking seriously from the moment you start working.

As a thumb rule, the retirement corpus should be about 25 times your current annual expenses.

If you are 26 years old now, and the current expenses are Rs 3 lakh annually (Rs 25,000 a month), your retirement corpus should be at least Rs 75 lakh.  

You must aim to go into retirement without debt. Make sure your investments are such that income from it funds your lifestyle during your golden years.

Related: 5 Things to do if your financial information is stolen 

Final Words

Tracking your personal financial plan through periodic financial reviews is advisable simply because it ensures your own financial security. The reviews become all the more necessary during periods of economic uncertainty.

In the end, it will be you who will feel confident about meeting your retirement savings and other goals. Check out the 7 Pillars of financial planning to keep your financial portfolio up-to-date and your strategies aligned with your objectives.

How I did it

Praveen Nair

Ever since I retired, I have looked forward to the festive season with added zeal. It is the buzz that I need once in a year in my laidback post-retirement life. I like to celebrate the occasion, get the house painted or renovated, buy gifts for my dear ones or go on a vacation. These things… Read more

Swati Mehra

A couple of years ago I was over the moon after landing my first job. I celebrated regally during the festive season that ensued, only to land in a financial soup for the next few months. With gargantuan credit card bills and barely any cash left, I had no other option but to default the payment… Read more

Rohansh Pathak

It is highly unlikely that all the expenses made during the festive season were worth making in the first place. This is the time of the year when unavoidable expenses are bound to upset your budget plans, and you can do little about it. However, I have made it a point to have a look at the… Read more

Shubhra Banerjee

I am a single mother of one. I lost my husband just 5 years into my marriage. Life has been a struggle for me, but I have managed it and today I have no complaints. 

I was a young widow with a 3 year old son when my husband passed away due to a heart attack. My parents were my rock… Read more