Cashflow modelling

Posted 26 August 2021 | The Penny Group


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How does cashflow modelling help you with personal financial planning

Financial planning can be a confusing and difficult process to navigate. One of the tools we use to simplify the process is cashflow modelling, it’s a strategy that offers significant benefits to clients and is useful for illustrating what are often complex financial plans for clients.

In simple terms, cashflow modelling is the process of assessing your current wealth and, from this, forecasting how it will change over time. It considers both income and expenditure, helping to make clear how your finances may change in the future.

It sounds straightforward but there is a lot that feeds into the process and the more information that is used, the better the results. You should include areas such as property, wealth, pension and investments values, income, expenditure, and debts. Once completed, you go on to calculate how your wealth will be impacted by factors like growth, inflation, and interest rates over the years. As you can imagine, this can get complicated. An effective cashflow modelling tool does all these calculations behind the scenes, giving you a visual representation of the information, and allows you to run various “what if” scenarios.

But you may be thinking, how does this add value to me? We have summarised seven ways in which it can help you be financially organised and help achieve your aspirations:

1. Project your lifetime wealth

Cashflow modelling can give you an idea of how your wealth will change over your lifetime. It can help you see which products are best for maximising your savings whilst keeping your long-term goals in mind. It also helps make your aspirations seem more tangible and demonstrate how the steps you are taking will have an impact over the longer term.

2. Analyse and assess your spending patterns

The process can show you where your money is going and helps you keep track of it. It gives you an indication of where you can cut back and what difference it will make, this could enable you to increase savings. Having a visual representation of where your money is going can help you understand whether your finances are in line with your priorities.

3. Gain insight into retirement savings and planning

When you start saving for retirement it is likely to be decades away. As a result, workers are often unsure of how much they have saved or, if it is enough for their retirement plans. Using a cashflow modelling tool means you can see how your pension savings are projected to grow over the years and the level of income it can provide once you decide to retire.

4. Demonstrate the effects of varying inflation and investment returns

Inflation and returns will have an impact on your wealth. With these two important factors varying over time, it can be difficult to assess the full effect of them. By adjusting the levels of interest or return when cashflow modelling, you can start to create a picture of the different results of varying scenarios. This can be particularly useful for investments and weighing up risk with potential returns.

5. Provide a visual representation of your goals

Saving or investing with long-term goals in mind can be challenging. The small steps you take regularly towards them can seem insignificant. Cashflow modelling can give you a visual representation of how you’re progressing towards objectives. It can help them seem more tangible and give meaning to your efforts, knowing they are setting you on the right path.

6. Assess the impact of life events

Throughout life, there will be events that affect your assets. Cashflow modelling can consider these and demonstrate how they will affect your estate. For example, it can show you how receiving an inheritance, downsizing your home, or losing your partner’s pension, should they die before you, how it will impact on your wealth and lifestyle. You cannot always predict what will happen but cashflow modelling can help you prepare for the unexpected.

7. Plan your legacy

It is difficult to plan your legacy without knowing exactly how much your assets are likely to be worth when you pass away. Cashflow modelling can give you a projection of your estate at different points of your life, allowing you to plan more effectively. You can also see how other decisions, such as needing long-term care, would have on the inheritance you leave behind for loved ones.

The importance of keeping cashflow modelling data up to date

To reap the full benefits of cashflow modelling, it is imperative that the data used is kept up to date. The forecasts are only as good as the information it is based on. Working from previous cashflow models could mean your decisions are based on inaccurate assumptions and projections.

To get the best results from cashflow modelling, you should provide an accurate and recent evaluation of your wealth. Additionally, it should reflect current wider influences, such as interest rates and stock market performance.

If you are interested in learning how cashflow modelling can help you, please get in touch with us. 

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