Many people are unsure how recent interest rate cuts are affecting their finances and investments. Before you adjust your current strategy, it’s worth carrying out a cash-flow modelling exercise. Poor or reactive responses to your financial planning could result in you missing out on profitable opportunities. We look at why a cash-flow plan helps you make better financial decisions for both your lifestyle today and your future retirement plans.
Why you should consider the impact of inflation on cash
Inflation erodes the real value of cash over time, reducing its purchasing power. The rate of inflation affects the level of prices you pay for goods and services. So, if you have £100 and a loaf of bread costs £2, then you can buy 50 loaves. But if inflation rises to 5%, then a loaf of bread will cost £2.10 next year. You’ve not lost money; you’ve lost the ability to buy 50 loaves for £100. Therefore, holding cash in low-interest accounts could erode your savings.
For many people, holding cash can feel safe, but the most important factor is how you structure your money. Due to changes in interest rates, ISA rules, and inflation, many people are currently rethinking their cash strategy. However, it’s important not to make hasty decisions. When your financial decisions are emotionally driven or you’re holding too much cash when markets improve, this can result in lost opportunities and returns.
Instead of holding cash in one large pot, take a structured approach to your financial planning. Start by carrying out a cash-flow modelling exercise so you know what you have today and how much you will have tomorrow. For more guidance on the impact of inflation, see our blog ISA Rule Changes: Is it time to rethink your cash strategy?
What is cash flow modelling?
Cash-flow modelling provides you with a detailed picture of both your current and future financial position. Your income and outgoings throughout your lifetime are modelled against various ‘what if’ scenarios, including changes to inflation and interest rates.
Cash-flow modelling helps you understand what could happen if your financial plan were put under pressure in different circumstances. It gives you a clear view of the potential financial impact caused by varying economic climates, and it can make realistic assumptions for future investment returns. You can also factor in big life events that are both expected and unexpected, so you are prepared for whatever lies ahead.
How to do a cash flow model
Before you carry out a cash-flow planning exercise, make a list of all possible sources of income today and in the future. Check your pension forecast, savings and investments. You should include any debts and expenses, as well as any potential lump sums from future property sales and inheritance.
Having a clear vision for your life goals is important for efficient cash-flow modelling. You might have plans to upgrade your car, buy a holiday home or a caravan, or enjoy luxury travel when you retire. You might also need to save enough to support adult children.
As we cannot control what life brings, this is where cash-flow modelling software shows you possible multiple outcomes, taking your finances into account. From rising inflation to interest rate changes and unexpected life events, a realistic cash-flow model will make your financial plan more resilient.
Our cutting-edge cash flow modelling software
At Balance: Wealth Planning, we use sophisticated software to model your financial future and create a forecast. This Lifetime Forecast is a key part of our clients’ financial plans.
Our cash-flow modelling process considers your income, spending, savings and debts, and how these might change in the future. We factor in the impact of tax and inflation, as well as several ‘what if’ scenarios, so you know what would happen if different decisions were made.
Why cash flow modelling for retirement is essential
Unless you have a clear understanding of how much income you’ll have when you retire, there’s a risk you could run out of money. Cash-flow modelling helps you prepare in advance for your retirement. Your Lifetime Forecast gives you the insights you need to ensure you can look forward to a comfortable retirement in your later years.
When you combine cash-flow modelling with a passive investment approach, your financial plan will be resilient to economic changes. With a robust and sensible financial plan, you will know when you can afford to retire and how much you will have to support your golden years.
Certified Financial Planners, Nottingham
It’s a common misconception that keeping money ‘safe’ in a standard savings account means that it’s protected. Although schemes like the FSCS protect your bank accounts, keeping large cash sums in low-interest accounts means that the value of your money will eventually erode. By understanding how to structure your savings and investments, you can make more confident and informed decisions to help secure your financial future.
At Balance: Wealth Planning, our financial planners will start by carrying out a cash-flow planning exercise to create your Lifetime Wealth Forecast. Based on your life goals, we’ll then build a financial plan that accurately aligns with your financial situation. Our team use a mix of financial planning tools to give you more control over your savings and investments.
For a financial review and cash-flow modelling, get in touch with our financial planning team.
Sources:
(Balance: Wealth website)
https://www.brewin.co.uk/insights/know-your-future-cashflow-modelling
https://www.investopedia.com/articles/basics/10/how-to-avoid-emotional-investing.asp
https://www.sterlingandlaw.com/five-emotional-investment-decisions-to-avoid/
