A financial plan gives you the knowledge you need to make important decisions about your life, while a stable cash flow will enable you to achieve your plans. So how do financial planning and cash-flow modelling work? Let’s look at this topic in more detail, so you have a greater understanding of what happens when we carry out a financial planning review.
Almost every financial planner or adviser will use some sort of cash-flow modelling tool to help them advise their clients. This is usually done via a sophisticated technology platform that can calculate varying scenarios. But, ultimately, it’s how the cash-flow modelling is performed that will provide you with the level of insights you need for a robust financial plan.
What is a ‘cash flow model’?
Put simply, a cash flow model looks at your ‘cash going in’ and your ‘cash going out’. It provides you with a detailed view of your income, expenditure, savings, investments and valuable assets, such as property or a business. This detailed picture of your finances looks forward, year by year, to give you a financial forecast for the future.
A cash flow model ensures that:
- You don’t run out of money today and in the future.
- You have a detailed analysis of your income and outgoings.
- You know what money you can use to save, invest or gift.
- You can achieve your aims and aspirations.
- You can reduce your tax liabilities.
Cash-flow modelling takes into consideration potential rises in income, inflation and interest rates. It’s important to know how much your money, property and assets will be worth 10 or 20 years after you retire. It’s crucial your cash flow forecast reflects realistic growth rates when it comes to your savings and investments. So, this is why it’s important to look at different possible outcomes, factoring in big life events and potential challenges.
How does the cash-flow modelling process work?
First, we’ll look at your income, outgoings and any debts. We’ll also look at all of your revenue streams and any capital you have, such as savings and investments. Our financial planners will review whether your current income and financial resources are enough to cover your current lifestyle and desired level of spending. Our aim is to ensure you have a level of financial security both now and in the future, through a sensible planning approach.
It’s also important to understand that a cash flow model will enable you to see what would happen should your income drop or your outgoings increase. In today’s cost-of-living crisis with rising household bills, maintaining a stable cash flow is more crucial than ever. Cash-flow modelling will also help you prepare for any changes in investment returns, as a result of market volatility.
The average person lives 10 years longer
In the 1970s, the average life span was 71 compared to 81 today. It’s also common to see people live well into their 90s. But this poses a problem, as pension income now has to stretch further into people’s retirement years. Also, some people might choose to retire thirty years before they are likely to pass away. Therefore, a cash flow forecast will help you enjoy your income today and provide financial security for your golden years.
Your financial planner will prepare you for how your money will last both now and in the future, but they will also consider other factors too. Inevitably, close family members will pass away. You or your partner might become seriously ill. If you have a business, this might be affected by a change in the marketplace and have to close. If your income changes, you might not be able to afford your mortgage payments and you could lose your home.
Although some people may feel this is catastrophising, it’s important to take into account various possible challenges. The reality is that most people don’t know how long they will live for and what will happen to them in the future. A cash flow model will help you prepare a financial safety buffer, should you experience challenging times or a big life event.
Cash flow is the key to financial planning
A cash flow model is at the heart of financial planning. It will make you think about your lifestyle and consider your future. It will also help you understand what you need to spend today and how to use your money.
But it’s important that any cash-flow modelling is done with the person’s lifestyle and goals in mind. This is why our financial planners work closely with our clients to understand their aims and aspirations. A cash flow model needs to directly relate to the outcomes required by the client. Anybody can hypothesise on what might be, rather than planning for what will be.
Our financial planning team’s aim is to provide a secure financial future for our clients, so they can look forward to a comfortable or luxurious retirement. Cash-flow modelling is an important tool which helps us support you with your lifestyle goals and retirement plans.