12/06/20Cashflow planning: Helping to answer ‘what if…’ questions
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 are setting out goals, it is not uncommon to wonder if you would still be able to meet them if things outside of your control have an impact.
When you start putting together a financial plan one of the valuable tools that can put your mind at ease is cashflow planning.
What is cashflow planning?
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show how your assets will change in value in a range of circumstances, such as average investment performance or income withdrawn from a pension.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 is 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 do not quite go according to plan. Whether it is 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 are 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 do not.
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?
Often with these questions, there is something you want to do, or at least thinking about, but you are hesitant to do so because you are 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 do not 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.
Alternatively, you may find there is a ‘gap’ in your financial plan. However, by identifying this, you are in a position to take steps to put a safety net in place. If you are 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 is 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 is input. This is why it is 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 cannot 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. If you would like to discuss your aspirations and the steps you could take to ensure you are on the right track, please get in touch.
Please note: The Financial Conduct Authority does not regulate cashflow planning.