Watch Out for These 7 Warning Signs of Financial Plan Failure

From lack of timely action during the plan's execution and continued poor financial habits to unexpected emergencies, many factors can derail your financial plan.

[Read: 13 Key Rules of Financial Planning ]

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In this article, we will explore the common reasons why financial plans fail and how you can avoid them to stay on track towards your goals.

1. Failing to Follow the Plan

While many people take the initiative to create a financial plan, often with the assistance of a professional financial planner, they may fail to fully implement the advice provided.

This can happen for various reasons, with common culprits being procrastination, a hectic schedule, or simply losing focus.

For example, your financial planner may suggest setting up a monthly investment in a retirement fund or reviewing and updating your insurance policies to ensure adequate coverage.

If these actions are delayed or ignored, achieving your financial goals within the planned timeframe becomes increasingly challenging. Taking timely and appropriate actions is imperative to securing a better future for yourself and your family.

2. Not Following a Budget

Your financial plan may require you to cut back on certain expenses to save and invest more towards your financial goals. Achieving this usually involves making necessary adjustments to your lifestyle, both for you and your family.

However, failing to create and adhere to a budget can seriously undermine these efforts. Without a budget in place, it becomes all too easy to prioritise immediate spending over long-term saving.

A lack of budget and overspending is a dangerous combination that often leads to excessive borrowing, trapping you in a vicious cycle of debt that becomes increasingly difficult to break.

To avoid this, implementing and meticulously following a budget is essential.

One effective approach is the 50/20/30 budget rule, which allocates 50% of your income towards fixed expenses such as bills, loan repayments, and groceries, 20% towards savings and investments, and 30% towards discretionary spending like leisure activities and hobbies.

Regularly reviewing your budget is equally important to ensure that you're sticking to it and adjusting as necessary. This practice ensures that your financial goals stay aligned with the spending and long-term plans.

3. Not Aligning Investments with Your Financial Goals

Many people make the mistake of investing in an ad-hoc manner based on the current market trends, or they simply go along with what their friends and relatives are doing.

Since everyone's financial goals are unique, it naturally follows that their investment strategy should be customised to suit individual objectives.

To ensure your investments are purposeful, start by setting S.M.A.R.T. financial goals - those that are Specific, Measurable, Achievable, Realistic, and Time-bound. Clearly define the amount of money you aim to accumulate, the timeline for achieving it, and your tolerance for risk.

[Read: How to Start Investing in Mutual Funds: A Comprehensive Guide]

Once your goals are outlined, take the time to research investment options that align with your objectives. Ensure that you're taking informed, calculated risks as you grow your wealth steadily and advance towards your financial goals.

4. Not Taking Investment Risks at All

For many people, the fear of risk leads to avoiding investments altogether. They instead prefer to save money in traditional savings accounts or bank deposits.

However, the desire to avoid investment risks can lead to another, and perhaps greater, risk - the erosion of your hard-earned money by inflation. To achieve long-term financial goals, it is crucial to invest in productive and liquid avenues that have the potential to deliver inflation-beating returns.

Simply allocating higher funds to assets like real estate - a popular choice in the past - is no longer an optimal strategy. While real estate can still be a valuable component of a diversified portfolio, relying on it is not ideal due to its inherent illiquidity, high initial investment, and ongoing maintenance costs.

The key lies in taking calculated risks. Improving your financial literacy is important to better assess the risks and rewards of different investment products, and select those that align with your objectives.

Alternatively, working with a SEBI-registered investment advisor can guide you in creating a well-diversified investment portfolio. The professional advisor will take into account your financial goals, risk tolerance, investment timeline, and other economic factors to ensure your portfolio is positioned for long-term success.

5. Investing Only When You're Left with an Investible Surplus

Another common financial planning pitfall is investing only when you have a surplus of money after covering your expenses.

While this approach may seem logical, it often leads to sporadic and insufficient investments, which can disrupt compounding, slow down wealth creation, and ultimately delay the fulfilment of your financial goals.

To avoid this, make sure that investing is one of your main priorities rather than an afterthought. By carefully controlling your expenses and budgeting effectively, you can ensure that you consistently have an investible surplus to allocate towards prudent investments.

Building the habit of regular investing, even with smaller amounts, can help you stay disciplined and take advantage of compounding returns over time.

6. Underestimating Asset Allocation

Not taking asset allocation seriously will leave you with an unbalanced portfolio, exposing you to unnecessary risks or limiting your returns.

On one end of the investment spectrum lies the potential for high returns, though it is accompanied by the risk of significant losses. On the other end is stability and lower risk but with potentially modest returns. Asset allocation helps you walk the fine line in between, strategically distributing your investments across various asset classes to match your desired risk-return profile.

By spreading your investments across different asset classes - such as equities (stocks), fixed income (bonds), gold (commodities), and cash or cash equivalents - you can reduce the impact of market volatility in a single asset class. When one asset class experiences losses, another may generate gains, helping to stabilise your portfolio's overall performance and reduce risks.

Thoughtful asset allocation acts as a safety net, protecting you from overexposure to a single asset class while allowing your portfolio to grow steadily over time. Ignoring this core tenet of investing can leave your financial plan vulnerable to market volatility and hinder your ability to achieve your goals.

7. Not Having Enough Contingency Reserve

One of the critical reasons for a financial plan to fail is not establishing a sufficient contingency fund, also known as an emergency or rainy-day fund.

Without this safety net, unexpected expenses such as medical emergencies or sudden job loss can leave you scrambling for funds. Relying on credit cards or loans to manage these costs can lead to mounting debt and increased financial stress.

Ideally, you should aim to save an amount equivalent to 12 to 18 months of your regular monthly expenses, including loan EMIs. This ensures you are well-prepared for emergencies without having to dip into investments meant for specific financial goals.

To ensure this fund remains accessible for emergencies, consider holding it in a separate savings account or investing in highly liquid instruments, such as the best liquid funds.

Make sure to contribute regularly to your contingency fund until it reaches the desired (and adequate) level. Whether you allocate a fixed amount from each paycheque or set aside a portion of windfalls like bonuses or tax refunds, regular contributions will help you build this crucial financial safety net.

To Conclude...

The success of a financial plan depends not only on how thoughtfully it is constructed but also on how diligently it is executed.

To achieve your financial goals and secure a stable financial future, it is essential to remain committed to the financial planning process and take consistent action. Remember that financial planning is not a one-time exercise. Regularly reviewing your plan ensures it stays aligned with your goals and adapts to changing circumstances.

As life evolves - whether through career changes, family milestones, or unexpected events - your financial plan must be updated to reflect these shifts and their potential impact.

Happy planning!

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Hiral Bhuta is a Investment Consultant & Principal Officer. She is a seasoned professional in the financial services industry, currently serving as an Investment Advisor and Financial Planner at PersonalFN. With her expertise, she plays a pivotal role as the Principal Officer appointed under SEBI's amended IA Regulation. Hiral holds distinguished certifications such as Certified Financial Planner (CFP) and NISM XA & XB, complemented by a post-graduate degree in commerce (M. Com). Her primary areas of focus encompass financial planning, investment advisory, and wealth management, where she leverages her knowledge and skills to provide tailored solutions to clients. With a cumulative experience spanning five years, Hiral brings a wealth of expertise and insight to her role at PersonalFN, ensuring clients receive expert guidance and support in navigating their financial goals.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.