Imagine if you could foresee your financial future. How valuable would that be in allowing you to live a fulfilling life? Especially when it means you can plan ahead for and comfortably make life-changing decisions like moving home or changing jobs. Cash flow planning is one way of doing just that.
Whilst it won’t solve all of your problems, it is an effective way of taking control of your finances and making informed choices.
Cash flow planning (also referred to as forecasting) is a tool used to review what can be achieved with your assets. By projecting your financial position into the future, it enables you to predict upcoming cash needs using several realistic assumptions. The main purpose is to see if you are likely to run out of money and, if so, when.
Cash flow programs take into account your income, spending, and overall net worth to understand what your finances could look like throughout your lifetime. In that way, they are extremely useful for making financial decisions.
The graph below is an example of a cash flow plan. Along the left hand side is the total asset portfolio value of the client and, when we apply their spending habits, you can see how this decreases over time. Although not as drastically as one might imagine, thanks to return on their investments. The colours indicate the different asset types that make up the portfolio.
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.
Understanding whether you can meet your goals in life
You may have various financial objectives. Some that come up frequently amongst clients are security in the future, having enough money to live a fulfilled lifestyle, and supporting loved ones. Knowing how all of these might interact together and when each will come into play is an important step to understanding if you have enough money to achieve them all. Using the cash flow plan to plot scenarios such as gifting sums to family or friends, buying a new home, or retiring will help you review whether any goals need to be adjusted or re-prioritised.
Through conversations about goals, it becomes apparent that financial security for one client is different for another. Some will find appeal in a downsized house to live in forever, with the mortgage paid off, and others may aim for a new holiday home, for example.
A financial advisor can place these monetary objectives into the cash flow plan to inform investment decisions and understand what kind of risk should be taken and the returns required. It enables them to act in alignment with your life goals and appreciate what they are helping to fund in the future.
Investing in big ticket items with confidence
'Should we go on that dream holiday?'
'Is that new property a good investment?'
'Can we afford to send the kids to private school or university?'
'Is it wise to invest into the business?'
Just some of the questions we are asked by clients and decisions they are faced with.
Cash flow planning provides reassurance so you can make these choices with confidence, thanks to the ability to be able to plot them into the graph and see how they affect your financial position.
Planning for retirement
Another important question cash flows help us to answer is ‘When can I afford to retire?’
Or, if you have already finished work, ‘Is my current retirement lifestyle sustainable?’
Once we understand the income you need to life your desired lifestyle, we can plot this against actual income.
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!
We delve deeper into cash flow planning for retirement here, if you are interested in finding out more.
Providing reassurance around ‘what-if’ scenarios
As much as we hate to admit it, sometimes life throws curveballs and, when it comes to finances, it is aways best to be as prepared as possible. Clearly, we cannot predict everything but it provides many people comfort to know that they can manage financially when faced with a difficult scenario.
We can imagine scenarios such as needing to help loved ones financially, the inability to work, changes in expected return on investment amongst other situations. Factoring these into the cash flow plan shows how assets are affected by broadly unpredictable circumstances. It also means your adviser can reassure you around what can be done to make life easier if this was to occur.
Cash flow planning is a core part of our service at Stephen Eve Financial Planning. It is included in all of our packages, from entry level right up to the more premium tier of services. If you feel you could benefit from a cash flow plan, we would be happy to talk you through how it works in a complimentary initial consultation.
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.
