You have probably heard us mention ‘cashflow modelling’ before. If you’re a client, you will have worked through it with us. Maybe you feel you have a good understanding of this tool and how it works. But do you really know how powerful it is for helping you achieve your goals?
Perhaps it doesn’t sound like the most exciting thing in the world, and maybe it seems complicated. But in terms of giving you reassurance for your financial future, it’s one of the most useful tools you could have. Most importantly, it will demonstrate whether you can achieve your objectives both now and in the future.
What is cashflow modelling?
In simple terms, it’s just a way to assess your current wealth and forecast how it may change in the years ahead. To do that, we need you to gather information about your income and expenditure, what your property is worth, and the value of your investments and debts. When that’s done, the calculations can be done behind the scenes. The result is a clear and simple visual representation of how your finances may look at different points in the future.
Why is it useful?
Here are five reasons why cashflow modelling can be incredibly useful to help you plan and prepare for your future.
1. See how your money is spent
Cashflow modelling can help you see where your money is going. Once you have a visual picture of your expenditure, it becomes easy to identify where you can make savings, or spend a little more, or whatever it may be. We can then model what difference those decisions will make to your long-term goals.
2. Understand what your retirement looks like
Many people have no idea what their pension is worth – or if it’s enough to do everything they want to do. Cashflow modelling helps you see a projection of how your pension savings may grow over the years, what level of income you can expect when you start drawing from it, and what you can do to supplement it if necessary. It will even show you whether you need to rely on this income at all and, if so, how much.
3. See the effects of inflation and investment returns
Because these two things are changing all the time, it can be hard to understand how they’ll affect your wealth long-term. With cashflow modelling, the levels of interest or return can be adjusted, to show you different results from different scenarios.
4. Understand how life events could change things
Paying for a wedding, receiving an inheritance, or downsizing your home will all have an impact on your money and lifestyle. We’ll also tackle the more difficult subjects such as death of a partner, or disability and needing care. While you can’t predict everything that may happen, if you factor in all the ‘ifs’ into your cashflow, at least you’ll be prepared for most eventualities.
5. Leave a legacy
With cashflow modelling, you can get a projection of your estate at different points in your life. This means you can plan more effectively for what happens after you pass away. You can also project how things like long-term care may affect your wealth and what you can leave behind for your loved ones.
You get out what you put in
Everything you get out of cashflow modelling hinges on the information that’s put in – and that information is changing all the time. It’s no good going through the process and then thinking that’s done for the next thirty years! For it to be effective, your cashflow needs to be updated regularly. It needs to take into account tax, interest rates, stock market conditions, and what’s happening in your life.
No matter how busy you are, make sure you can set aside some time annually to gather any new information and meet with your Financial Planner. Then, updates can be made and plans readjusted if need be. You have heard the saying, “Garbage in, garbage out”. By putting in that bit of effort, you will have peace of mind and a track to run on to achieve all the things that you want to do.
Whatever life throws at you we’ll be on hand to guide you with your own personal financial plan.
Are you up to date?
If you’d like to find out more about developing your personal financial plan and how it can help you, or if this has reminded you that it’s time for a review, please get in touch.