When you begin making a financial plan, you could be looking several decades ahead, and we all know the unexpected can derail even the best-laid plans. So, as you’re setting out goals, it’s not uncommon to wonder if you’d still be able to meet them if things outside of your control have an impact. Keith Bonner, Managing Partner and Independent Financial Adviser at Pembroke Financial explains how cashflow planning can put your mind at ease.
What is cashflow planning?
Keith begins: “Cashflow planning is a tool that helps forecast how your wealth will change over time. We can use this to show how your assets will change in value in a range of circumstances, such as average investment performance or income withdrawn from a pension. It’s a step that can help you have confidence in the lifestyle and financial decisions you make.
“However, the variables can be changed to highlight the impact of what would happen if things don’t quite go according to plan. Whether it’s down to a decision you make or something out of your control, cashflow planning can highlight the short, medium and long-term consequences on your finances and goals. As a result, it can be a useful way of answering ‘what if’ questions that may be causing concern.”
Answering ‘what if’ questions
If you’re asking ‘what if’ questions relating to your financial plan, they can be split into two categories: the ones you have control over and those that you don’t.
Those that you do have control over often stem from wanting to take a certain action but being unsure if your finances match your plans. These types of questions could include:
- What if I retire 10 years early?
- What if I provide a financial gift to children or grandchildren?
- What if I take a lump sum from investments to fund a once in a lifetime experience?
Keith continues: “Often with these questions, there’s something you want to do, or at least thinking about, but you’re hesitant to do so because you’re worried about the long-term impact. You may need to consider the effects decades from now, which can be challenging. Cashflow planning can help provide a visual representation of the impact a decision would have.
“We often find that clients’ finances are in better shape than they believe, allowing them to move forward with plans with confidence.”
The second type of ‘what if’ questions, those you don’t have control over, often stem from worries about the future. These could include:
- What if investments returns are lower than expected?
- What if I passed away, would my partner be financially secure?
- What if I needed care in my later years?
“Cashflow modelling can help you understand how these scenarios would have an impact on your short, medium and long-term goals. It can highlight that you already have the necessary measures in place, allowing you to focus on meeting goals,” Keith adds.
“Alternatively, you may find there’s a ‘gap’ in your financial plan. However, by identifying this, you’re in a position to take steps to put a safety net in place. If you’re worried about the financial security of loved ones if you were to pass away, for example, this could include purchasing a joint Annuity, providing a partner with a guaranteed income for life, or taking out a life insurance policy.”
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.
The limitations of cashflow planning
Whilst cashflow planning can be incredibly useful, there are limitations to weigh up too.
First of all, how useful the forecasts are will be dependent on the data that’s input. This is why it’s important to consider assets and goals when gathering information, as well as keeping the data up to date.
Second, cashflow planning will have to make certain assumptions. This may include your income over an extended period or investment performance, which can’t be guaranteed. This is combatted by modelling different scenarios and stress testing plans, helping to give you an idea of how your financial plan would perform under different conditions.
Cashflow modelling is just one of the tools that can support your financial plans and it can be an incredibly useful way of giving you a potential snapshot of the future and easing concerns.