How we use cashflow modelling to help plan your financial future

It’s impossible to accurately predict the future. I think that even the Brahan Seer, armed with the most efficient crystal ball imaginable, would have struggled to predict the events of the last few years!

Not knowing what will happen can make it difficult for you to plan for your future, in particular for long-term objectives like your retirement.

So, rather than just hoping everything will work out fine, my approach is to use a cashflow modelling tool to help my clients with their financial planning.

What is cashflow modelling?

Cashflow modelling is a tool used by advisers that helps us organise your finances to easily view and forecast how your wealth might change over time.

Using this, you can see how the value of your assets will change in a range of circumstances. We can model different growth rates for investments, inflation, and the income withdrawn from a pension.

The aim is to give you confidence that the lifestyle and financial decisions you make are correct and informed.

As well as modelling positive scenarios, you can see the impact of what would happen if things do not quite go according to plan.

This could be down to a decision you make or an event out of your control. Because of this, it can be a very useful way of answering “what if?” questions that may be giving you sleepless nights.

The advantages of cashflow modelling

There are many ways that using cashflow modelling can help you plan your financial future.

The three main ones are:

1. Projecting your lifetime wealth

One of the key outputs of a modelling tool is a clear projection of your future wealth, based on the information we input. This gives us a clear starting point to begin to model other scenarios based on your plans and aspirations.

 2. Seeing how life events could have an impact on your finances

We’ve already said that no one can accurately predict the future, but cashflow modelling can help you plan for the financial impact of big events – both positive and negative.

3. Informing your financial decision-making process

Decisions that are supported by research and factual evidence nearly always lead to a better outcome than ones based on a hunch or instinct.

The limitations of cashflow modelling

While cashflow modelling can be incredibly useful, it’s worth flagging up some of the limitations. 

First, cashflow forecasting is only as good as the data that is input. To use an expression much-loved by computer scientists: “garbage in, garbage out.”

Therefore, it’s important to consider all your financial circumstances – positive and negative – and to ensure the data is kept up to date.

Second, cashflow modelling involves making certain assumptions – for example, investment returns and your income in future years. Only by regularly reviewing forecasts and modelling different scenarios can we be confident that we’re giving you the financial reassurance that your plans are on track. 

Modelling different financial scenarios

There are two different scenarios where cashflow modelling can show you how your financial situation would be impacted:

Those that you control

These will often emanate from you wanting to take a certain action but being unsure if your finances can match your plans. Such scenarios could include:

• What if I retire in the next two years?
• What if I want to give my children a large sum of money?
• What if resigned from my job and took another position earning less money?

Often with these questions, there is something you want to do, or are at least thinking about, but you’re hesitant to do so because you’re worried about the long-term impact.

Cashflow modelling can help provide a visual representation of the impact such a decision would have.

Those that you have no control over

These types of scenario are generally related to concerns or worries that you may have about how certain events could impact your finances. For example:

• What if there is a big stock-market crash?
• If I passed away, would my partner be financially secure?
• What if I need long-term care when I get older?

Cashflow modelling can help you understand how these potential events could impact on your financial plans. It means we can take steps to correct any potential shortfalls, as well as confirm that you already have the measures in place to cope with such events.

Confronting concerns about your future can be difficult, but it’s a step that can lead to a more robust financial plan that you have complete confidence in. No more sleepless nights!

My approach to cashflow modelling

Most of you will know that cashflow modelling forms an integral part of the reviews we have.

The cashflow system I generally use is called “Truth”. I find it’s incredibly useful for organising financial data in an easy-to-view manner and to demonstrate what your financial future might look like. 

If I believe that a client’s particular circumstances call for a more forensic, in-depth view, I’ll also use a different cashflow modelling tool called “Timelineapp”. This models the performance of different investment asset classes using historic data going back to before the Wall Street Crash.

So, if you are concerned about the potential impact of another market crash, we’re able to use Timelineapp to model how robust your investment strategy is to withstand such a fall.

The key thing is not to see a cashflow forecast as a one-off event. The most important part of it all is reviewing it regularly – annually for most clients – to make sure you remain on track.

The importance of regular cashflow reviews

Going back to the original point I made at the start of this article, no one can predict what will happen in the future. We can only make informed judgments based on the best information available.

That’s why it’s so important that the information being used for cashflow planning is up to date. Your financial, employment and personal circumstances will change, so it’s essential that the details used for cashflow forecasting change as your situation does.

I usually recommend that we review cashflow forecasts annually, so I can work with you to ensure you are still on track to achieve your financial goals.

Get in touch

If you would like to know more about how I use cashflow modelling, and how it could help you, please get in touch.

Email graeme@macfp.co.uk or call 01349 832849.