Financial confidence can have a hugely positive impact on lives. We wanted to share with you one of the methods we use to give individuals we work with confidence in their financial future; cashflow planning.
As financial advisers, our goal is to give each client confidence in their financial future. There are many stages in life where financial circumstances and priorities can change, from experiencing divorce to retiring. One of the tools we use to help clients understand how their finances may change over the short, medium and long term is cashflow modelling.
What is cashflow modelling?
Cashflow modelling is a way of showing how finances can change over an extended period of time depending on the decisions made today, as well as how circumstances out of a client’s control can have an impact.
It starts by collecting data that represents a client’s current situation. This may include how much they hold in pensions, income compared to lifestyle expenditure, and the size of an investment portfolio. By inputting this information, we’re able to create a visual representation of wealth over time.
The visual aspect of cashflow modelling is one of the key benefits. It can often be difficult to understand wealth and the impact on lifestyle when you’re talking about numbers. A client may know their investment portfolio is targeting growth of 4% per annum, but what will that mean in five- or 20-years’ time?
Whilst incredibly useful, cashflow modelling goes beyond this. It allows you to manipulate the data to show how decisions will affect short, medium and long-term wealth. As a result, it can help answer questions like:
- Will I have enough income to achieve my desired retirement lifestyle if I give up work five years early?
- Will my partner be able to cope financially if I were to pass away?
- How much can I expect to leave to my loved ones as an inheritance?
- What if my investments under-perform?
- How would taking a lump sum out of my pension at 55 affect future retirement income?
Giving our clients confidence in the long term
Cashflow planning helps clients answer ‘what if?’ questions and allow them to put appropriate measures in place where necessary. For example, a client that is worried about how well their family would cope if something were to happen to them may decide it’s appropriate to take out life insurance or income protection policies to act as a safety net.
Understanding how wealth could change over the long term can help give clients the confidence they need to live their life.
The drawbacks of cashflow planning
Cashflow planning can be incredibly useful to a wide range of clients. However, there are drawbacks to the tool that should be kept in mind and balanced with other methods of ensuring financial confidence, including:
- It’s only as good as the information used: Effective cashflow modelling relies on the information that is added. If there are inaccuracies or omissions are made, it can mean the analysis delivered falls short.
- Unforeseen factors: You can use cashflow modelling to predict the impact of events outside of a client’s control. However, you do need to consider these in the first place, sometimes unforeseen events can have an effect that hasn’t been calculated.
- It needs to be regularly reviewed: The unexpected does happen and financial situations can change significantly over even a short period. As a result, to continue being useful to clients, cashflow modelling, and the information used, needs to be reviewed regularly.
- No guarantees: Finally, it’s important to remember that guarantees can’t be made. Whilst we can model how wealth would change if investments delivered 5% returns, markets could under-perform and affect the actual returns.
If you would like to learn more about cashflow modelling and how it may fit into your financial planning please get in touch.
