What is cashflow modelling and why should you use it?
“Planning is bringing the future into the present so that you can do something about it now.”
Alan Leakin.
What is Cashflow Modelling?
Cashflow modelling is a way of looking at your finances in the future. The information provided will allow you to make better plans so that you can ensure that your money will afford you the lifestyle you desire.
A Financial Planner using cashflow modelling will record, your current income, expected capital inflows, and your current expenditure to create a picture of your finances. He will also consider your current assets and debts. The planner will then project these forwards year by year using assumed rates of inflation, wage growth, interest rates and asset growth rates appropriate to your circumstances.
Based on the results the Financial Planner will be able to give you a good approximation of how well off or other wise you may be in the future.
Why should you use cashflow modelling?
My first thought is how is it possible to make a major financial decision without understanding the implications? We often do this as a pro’s and con’s exercise, or we agonise over a major financial choice. Cashflow modelling will bring a degree of clarity to these big financial decisions.
Let’s take a topical issue today. The Bank of Mummy and Daddy. How do parents calculate the impact on themselves of providing financial support for their offspring to say buy a property? Cashflow modelling will enable the size of the support, the timing of the support and possibly the nature of the support (Gift or Loan) to be tested. Cashflow modelling and the support of a Financial Planner can aid in the conversation by removing the emotion and making it factual and business like.
Equally I have often sat in a kitchen with clients as it is the only room in the house heated. This is because the client is worried that they have insufficient funds to meet their remaining lifetime expenses and so cut back on their comforts to manage this often-unfounded fear. By using cashflow modelling I can often demonstrate that they have more than enough funds and that they could in fact be more comfortable.
Cashflow modelling is not a silver bullet or infallible in determining financial outcomes. It requires a frank discussion of all a client’s goals and objectives. It also requires an honest disclosure of a client’s current income and more importantly expenditure. (A bank statement doesn’t lie) To be effective we must make certain assumptions about inflation, deposit rates, investment returns, wage growth and other asset appreciation percentages. These can be based on the best evidence we have today, but we know they will change over time. What cashflow modelling does however is remove some of the emotions we get when we discuss our personal finances. It will draw a picture for us of current circumstances and likely success in reaching our stated lifestyle desires. Cashflow modelling will allow a rational conversation that is evidence based and supported by a good understanding of how financial changes we make can influence these outcomes.
Financial Planning is developing a plan. As noted above by Alan Leakin “bringing the future into the present so that we can do something about it now.” But now is always changing and we need to review our progress against our plan and be able to adjust for the unforeseen or new needs. If you develop a relationship with a qualified Financial Planner, they will take that financial journey with you. They will be able to help you navigate through these changes and advise on what you need to do to deal with the unforeseen and still stay on track to meet your desired lifestyle goals. In this way they will guide you and remove some of the stress associated with big financial decisions.
