When you’re making financial decisions, one of the challenges is understanding the impact that it could have on your long-term finances. Not understanding the impact means you’re unsure what you should do, or when you do make a decision, you still won’t have full confidence in it. Financial planning can help you weigh up the short- and long-term implications.
Cashflow modelling is just one of the tools that can help create a plan you can rely on when working with a financial planner. Even if you’ve used cashflow modelling before, you might not be aware of how it works or how it adds value to your plans. Read on to find out.
What is “cashflow modelling”?
Cashflow modelling is used to forecast your financial future. It can help you understand how your wealth and income may change, whether you want to look 5 years ahead, or 30. It’s a way of answering questions like: “Do I have enough money?”
The first step when using cashflow modelling is to input data. This may include how much you have saved in your pension, your current income, or the size of your investment portfolio. It’s important these figures are accurate as they provide the foundations for calculations.
On top of this basic information, you can add extra details that will provide a forecast. This information is based on assumptions that may include:
- The annual return of your investments
- Adding a certain amount to your pension until you reach pension age
- The rising cost of inflation and how it will impact your outgoings.
It’s important to note that you can’t guarantee these assumptions will happen, but they help build a relatively reliable picture of how your wealth will change over time. This can give you confidence in how financially secure your future will be. With this information, you can see where gaps are, allowing you to take steps to bridge them sooner.
Helping you make big financial and lifestyle decisions
When managing finances, you’ll face some big decisions. It can be difficult to know what the right option is. When using cashflow modelling, you can add new assumptions that will forecast your wealth based on different scenarios. This means you can answer questions like:
- Would I run out of money if I retired five years early?
- Would providing a financial gift to my children now affect my future?
- Can I afford to take a lump sum from my pension to travel now?
- Can I take a larger income from my pension and still have enough for the rest of my life?
Cashflow modelling lets you see how moving ahead with these types of decisions will affect your income now and in the future. It can help put the decisions you’re making into context. For example, if taking a lump sum from your pension to travel now meant a lower income in the future, would you do it? For some, travel will be a priority that means a lower long-term income is worth it. For others, scaling back travel plans would make more sense. Understanding the implications of your decisions can mean you make the choice that’s right for you.
It can also help you see how every day, smaller financial decisions can add up to provide you with more freedom in the future. For example, even a small increase in your pension contributions can mean you have the freedom to tick off bucket list items while still being financially secure.
Planning for the unexpected
Cashflow modelling doesn’t just help you answer questions when you’re deciding how to use your wealth; it can help you prepare for things that are outside of your control, too.
You may, for instance, worry about how your partner would cope financially if you passed away. Cashflow modelling can help you visualise this and show what steps you could take to provide security. This could mean taking out a life insurance policy or purchasing a joint annuity in retirement.
Alternatively, you may want to understand whether your retirement would still be on track if your investments didn’t deliver the expected returns. Or whether you could afford to pay for care in your later years.
These types of scenarios can be difficult to think about, but being proactive can provide peace of mind. By looking ahead, you’re in a better position to reach your goals and create financial security, even when the unexpected happens.
If you’d like to discuss how your decisions can affect your financial future, please contact us.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.