What is cash flow planning?

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Last updated: November 7, 2022

Cash flow planning is a tool we use to project a financial position into the future, it helps you to understand what your finances could look like throughout your lifetime. It takes into account your income, spending, and overall net worth. The graph below is an example of this.

Another way of thinking about cash flow is a simple bucket:

- You have water coming in at the top (salary, state pension etc.)
- You have the water in the bucket (savings, investments, pensions)
- You have your property on the outside

Then you have water dripping out of the bottom (routine spending, new cars, holidays).

Our job is to make sure the bucket never runs dry, but also to help you understand what you can afford to spend, and ensure you spend with confidence.

One key question the cash flow helps us to answer is ‘when can I afford to retire?’

The tool identifies any income shortfalls, both now and in the future, and then allocates funds from your investments to meet this shortfall. If there is a shortfall throughout, it will tell you at what age you run out of liquid capital, meaning you might need to work a little longer. Or if there is a surplus, it shows you how much your family might one day inherit or highlight how much more you could treat yourself!

However, the cash flow plan is only as good as the information you put into it.

We take time to ensure the plans are as accurate as possible, taking account of all regular and one-off spending items. We like to be conservative in the assumptions we use, so we index-link your annual spending, assume a sensible rate of return on property and investments, and we also assume you live to age 100!

Once you have the basic plan built and agreed, it’s then about having some fun, and using the cash flow to provide reassurance. If the position is positive, you can add in more one off spending items, like a new Ferrari, or a yacht… (lucky you!).

The benefits of cash flow planning

For us, the beauty of cash flow planning is that life-changing decisions can be made with the help of this tool. Whether that be a round-the-world cruise, or deciding to gift some money to your family, if you can see the position remaining positive with these items built in, it gives you real peace of mind.

You can also build in catastrophe planning scenarios to highlight the need for life cover, or income protection, and we show the impact of potential market falls to see how resilient the position is and stress-test the plan.

I like to start with the worst-case scenario, and this might be assuming you retire tomorrow, just to see what it looks like. We then work back from this to meet your true objectives. More often than not, we show you how our advice can help the position remain positive, and more importantly, help you live the life you want.

I could write a lot more about the benefits of cash flow planning but to summarise, it is a powerful tool, and I know all of my clients value it immensely.  After all, the most common outcome is me telling clients to spend more money, so who wouldn’t like that?!

We would love to help more clients to make life-changing decisions, so please get in touch with us if you are interested in an initial chat.

This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth.

The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.