How to know when to change your financial plan


Financial planning is like taking a long car trip. You plan your route, your schedule, and your eventual destination in advance; but then you have to be prepared to adjust for detours, traffic delays, bad weather, fatigue or other unexpected changes.

When it comes to financial planning, you face this same conflict between sticking to a long-range plan and dealing with the realities of life that occur along the way. The key is being able to distinguish between legitimate reasons to change your plan and simply getting misdirected by new developments until you no longer know where you are heading.

Life happens, and you adjust

Examples of life developments that may warrant a change in your financial plan are:

  1. Woman looking at computer screen

    Getting a raise. As your career starts to take shape, your earnings might change significantly enough to justify raising your lifestyle expectations, but this should be done as part of a plan.

    When people get that bump up in pay, they tend to feel like they have a little extra money and can afford to spend more freely. However, a raise should not be a trigger to spend indiscriminately because, in many cases, an increase in income is already an assumption incorporated into your long-term financial plan.

    After all, such plans have to account for inflation, and a lot of people plan on doing the bulk of their retirement saving during what they assume will be their peak earning years.
    Incorporating a pay raise into your long-term plan will allow you to distinguish between incremental increases that simply keep you on track and more significant jumps that truly accommodate a change in lifestyle.

  2. Having kids. Even if having kids was part of your long-term thinking all along, you need to anticipate the needs of your growing family and adjust your plan with each child. It can be tough to deny your kids anything if it seems you can afford it, but incorporating spending on the children into your financial plan will help you make sure to preserve your resources to best take care of their long-term needs.
  3. Financial setbacks. Losing a job, a drop in income, or a significant investment decline needs to be factored into your long-range plan. This can be disheartening; but the sooner you adjust your plan, the less impact it will have because you only compound the impact of a setback if you continue spending at a level based on resources you no longer have.
  4. Dreams come into focus. It may be a vacation home, a sailboat, or starting a business. It is not financially irresponsible to pursue your dreams as long as you have a plan and, as part of that plan, you can see how that pursuit will affect your other financial goals.
  5. Retirement vs. lifestyle. The desire to retire early can grow very strong, and long-range financial planning will help you see what impact early retirement would have on your lifestyle. It may be that freedom from work is a more important lifestyle priority to you than being able to afford a few more luxuries.

When to stay the course

If the above are legitimate reasons to change your financial plan, the following are examples of when you should stay on course:

  1. The urge to buy is not a plan. You may discover new things you want; but unless you incorporate them into your long-term plan before you commit, your spending will get pulled off course.
  2. Wait for investment windfalls to even out. A big year in the stock market can make people suddenly feel wealthy. Resist the temptation to spend that new wealth, because chances are you will need that extra money to cushion you against disappointing returns sometime in the future.
  3. Don't make career decisions in the heat of the moment. The emotional impulse to quit a job or retire can be strong, but remember that your career is a centerpiece of your financial plan. Don't take any action until you have measured its impact on your plan.

Having a structure to lean on helps

The key distinction between things that should change your financial plan and those that shouldn't is whether they truly represent a shift in long-term priorities or they're just a short-term impulse. This is where the structure of a financial plan can help. If you think you want to do something that wasn't part of the plan, don't simply act on that impulse. Try incorporating that action into your plan so you can see what long-term impact it will have.

Looking at your decisions as part of a long-term financial plan will allow you to see the trade-offs that will result from changing course, and perhaps force you to think about things a little longer before you act. That extra time to think can make all the difference between a financial mistake and a reasoned change in plan.

Do you have an overall financial plan for your life? How did you become aware that a financial plan would help, and what guides your decisions?

More about...Planning

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Beth
Beth
4 years ago

No offense to the writer, but isn’t this common sense to most of us by now? I’ll willing to bet most of us have been through some life event — marriage, divorce, death in the family, a windfall — that has made us readjust our plans. What’s your story? What did you learn? What can we learn? People don’t seem to be engaging with GRS content as much as they used to, and I wonder if generic pieces like this are the reason. I also think there’s a huge gap in the section on kids — what about insurance and… Read more »

getagrip
getagrip
4 years ago
Reply to  Beth

Agreed in that a generic piece like this gives little to “discuss” in that most folks on the site have a plan of some sort and read the article, maybe seeing one or two things they like, but seeing no connection to engage in a long discussion. Before when the site was more specific to one author, that voice carried weight because it was a share of a real persons attempt at something, e.g. here is what I am doing/planning, does it look smart to you or are you doing something different? While this type of article invites questions, there… Read more »

freebird
freebird
4 years ago
Reply to  getagrip

My take on this article is that it’s supposed to be a starting point for discussions in the comments, and the absence of specific examples is intended to not constrain the topics that might come up (nice starter set by the way, and don’t forget long term care insurance where lots of subscribers are getting sticker shock this year and wondering about this very question). Anyway I guess it’s up to us to help the author/moderator here. No I actually don’t have a financial plan, but I have a rough idea of what my needs and resources are and will… Read more »

Beth
Beth
4 years ago
Reply to  freebird

“Anyway I guess it’s up to us to help the author/moderator here.”

Yes, but let’s remember who is getting paid (the author and moderators) and who is providing content for free (us commenters). In the past, well-written content by JD and others always seemed to generate good discussion. It doesn’t seem like generic posts have the same effect.

mysticaltyger
mysticaltyger
4 years ago
Reply to  Beth

Agreed. GRS has really gone down in quality. I don’t know why I bother to visit any more. I keep hoping it will get better. Whatever happened to Honey Smith? Her pieces were good.

My Factoring Network
My Factoring Network
4 years ago

Financial planning is a long term task. The level of planning depends on your income and other sources. We all know our income and financial status and can predict the same for near future. It’s the time to be more vigilant and set up our financial setbacks. Nice Post!! Thanks for sharing.

Money Beagle
Money Beagle
4 years ago

It’s certainly true that every plan will evolve, especially if it’s long term as I think is the implication here. Circumstances will change, and I think the information here is a good starting point on looking how they might affect your plan.

Kai Jones
Kai Jones
4 years ago

Don’t forget illness or injury. Our savings (a year’s income–planned to use for a house downpayment and emergencies) was wiped out by multiple surgeries of my husband and myself over a period of five years, between medical bills and covering income loss during recovery. We are still paying off medical debt and trying to get back to the point where we can buy a house before retiring (we are both mid-50s).

Dee @ Color Me Frugal
Dee @ Color Me Frugal
4 years ago

“The urge to buy is not a plan.” – Love that! So well said. I can think of numerous times when we have been fighting the urge to buy, or to do something that would have a big impact on our finances. Last year we held off on making a move across the state, even though we really wanted to move, because we just did not yet have enough of our debt gone (and the move involved taking a pay cut). Now we are in much better shape with the debt and looking to make that move next spring! It… Read more »

Andrew @ secondhandmillionaires
Andrew @ secondhandmillionaires
4 years ago

Well for one, achieving my financial plan is my dream. I don’t have to worry about that boat creeping into my thoughts, as I value my future freedom from a job and more time spent with my wife as more valuable than any object. I think my plan is constantly developing. Every time I learn a new piece of financial info, or I develop a new skill, I incorporate that into my original plan. Every book I read, everything I learn, I try to apply that to myself to make me a better version of myself. I know my plan… Read more »

Adnan
Adnan
4 years ago

A more balanced approach to know when to change your financial plan is to follow your life cycle. Our financial priorities change as we age therefore the need to change our financial goals and plans must also change accordingly. What write has probably missed is how to link changes mentioned with our age. For example, if I get a raise if I am single with no kids, this raise may have a different value for me as compared to a person who is in his mid 40s with kids.

A nice effort in the end though.

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