When you hear the phrase “cashflow planning”, a common image which springs to mind is that of an accountant bent over spreadsheets in a large corporation.
It is perhaps less common to think of ordinary people and couples in their 30s, 40s or 50s trying to figure out how much money they will need to meet their financial goals over the coming years.
This latter picture is what we want to focus on here, in this article. You might have taken the positive step of drawing up a monthly budget to cover your present lifestyle, but have you gone even further to answer questions such as the following:
- At what age could I realistically have enough money to retire comfortably?
- How much more would I need to achieve that kind of retirement, if I don’t have enough?
- What kind of performance levels should my investments meet to achieve my goals?
- Can I afford to be more cautious/risk-taking with my investments?
- Do I have enough to justify large future expenses such as future holidays or family gifts?
- What is my plan in the event that my investments do not perform to my hopes?
- If I suddenly died or could no longer work, how can I ensure provision for my family?
These are the sorts of questions which we seek to address via cashflow planning, here at Cedar House. It involves using dedicated software to carefully look at your present and anticipated, future income and compare these to your expenses (both current and projected).
With a clearer picture of different possible future scenarios for your financial situation, you can make much more confident, well-informed decisions about your family’s financial future.
What happens when my cashflow is analysed?
Suppose you sit down with a financial planner, and using the software mentioned above you map out your cashflow over the coming years and decades. What happens next?
Broadly speaking, one of two pictures will start to emerge:
- You have plenty of money and assets. If you find yourself in this fortunate position, then it means you are on course to meet your financial goals. You, therefore, have the opportunity to talk about potentially retiring early, improving the quality of your lifestyle by spending more on things you enjoy and reducing your potential inheritance tax bill. You could also explore scaling back the level of risk in your investment strategy, to encourage wealth preservation (assuming growth is now less of a priority).
- Your financial assets fall short. In this situation, you are currently not on course to achieve your financial goals due to insufficient income, or high expenses, or likely due to some combination of the two. If this result from the analysis emerges, then it’s important to see this in a positive light. After all, it is better to know about your shortfalls now rather than have a nasty surprise later in life when it might be too late to act. At least right now, you can do something about it. In this situation, you have the opportunity to talk to your financial adviser about when your ideal retirement age would be, how you can increase your income over time and reduce unnecessary expenditure, and come up with a viable saving/investment play to move you towards your financial goals.
Example of cashflow planning
Susan sits down with her financial planner, and they run a cashflow forecast together. She is currently 60 years old, earns £70,000 per year and hopes to retire at 67.
The results from the software come back, and Susan pauses as she contemplates the financial figures on the graphs. Based on her current financial strategy, she would run out of money in retirement at the age of 88.
Of course, she might not live that long. Yet if she lives beyond that age (as around half a million British people currently do), then she would face significant financial difficulties. She needs a financial plan which can provide for her for the foreseeable future.
Looking at her cashflow forecast together, Susan’s financial planner can see that she is projected to earn tens of thousands of pounds over the next seven years leading up to her expected retirement age – which she would not be using at all. It would simply sit idly in her bank account if she were to carry on as she is doing.
However, what would happen to her cashflow forecast if this unused money was instead put into, say, a good stocks & shares ISA? The software analysis is run again to find out.
The results quickly come back, and Susan can see that she would now have enough money and assets to sustain her lifestyle and meet her financial goals – even if she lived to over 100!
It’s important to point out that cashflow modelling is not a hard science. Life is full of unexpected events which cannot be fully anticipated. You might unexpectedly get a new job down the line with a much higher salary, which would likely dramatically affect your financial plan. Or, perhaps you suddenly need to step back from a high-paying job to provide full-time care to a dependent.
Despite the uncertainties of life ahead of us, we owe it to our loved ones and ourselves to lay the best possible plans to look after everyone. Most of us recognise the wisdom of planning our immediate income and expenses through a sensible budget. Cashflow planning extends that principle into the years before you, to give you the best possible chance of meeting your goals.
If you are interested in speaking to us about your financial plan, then we invite you to get in touch to arrange a free, no-commitment consultation with a member of our team to discuss your options and get a clearer picture of the financial landscape in front of you.
Contact us today via 020 8366 4400 or email@example.com.