One common problem when it comes to planning your financial future is the fact that it’s difficult to predict what’s going to happen in the coming years.
You might have raised an eyebrow at someone who, at the start of 2020, told you that we’re going to spend the next two years dealing with the effects of a worldwide pandemic!
Not knowing what will happen in the coming years can make it difficult for you to plan for your future, in particular for long-term objectives like your retirement.
However, by using cashflow modelling, you can see how your financial position is likely to develop in the coming years. You can also model various scenarios to see how robust your planning is, and whether you need to make any changes. You can even see how your plans could be affected by cataclysmic events like a market crash or another pandemic.
Read on to find out more about how modelling works, and how it can really help you plan effectively for your future.
Cashflow modelling helps you plan effectively
Cashflow modelling is a tool used by financial advisers to help you forecast how your wealth will change over time.
Once a financial adviser has input all of your data, the modelling software then produces a report, or series of reports, to see how your assets will change in value in a range of circumstances.
The sort of assumptions that modelling can assess the impact of include:
- Projected investment performance
- Fluctuations in inflation
- Income you draw from your pension fund
- The value of other assets such as property or a business.
You can then use the projections, and the outputs produced, to inform the financial and lifestyle decisions you make. The reassurance this gives you, knowing that everything is on track, can be invaluable.
You can also model “what if?” scenarios. These can help you stress test your plans and assess the impact of both external and internal events, including:
- What if I retired early, or gave my children lump sum deposits for house purchase?
- How would a long period of inflation affect my investment portfolio?
- What if we downsized and bought a smaller property later in life?
4 benefits of cashflow modelling
There are four key benefits of making cashflow forecasting an integral part of your planning process.
- Decisions that are supported by research and factual evidence usually lead to a better outcome than ones based on a hunch or instinct.
- Regular reviews using cashflow modelling can help keep you on track and prompt you to make necessary adjustments if required.
- A clear idea of your wealth – both at the present time and in the future – can be invaluable. All your assets are included in a single, comprehensive report.
- We’ve already said that no one can accurately predict the future, but cashflow modelling can help you plan for the financial impact of big events – both positive and negative.
Cashflow modelling isn’t foolproof
It’s important to bear in mind, however, that cashflow modelling does have some limitations. One of the key potential restrictions on the effectiveness of modelling is the quality of the data used.
An expression often used by computer scientists is “garbage in, garbage out”. This means that if incorrect or out of date information is input, the results you get can be detrimentally affected.
So, the information used – such as investment fund values and income details – should be as current and accurate as possible. After all, if you’re making important decisions based on the results you get, you need to be confident that you’re doing so from the strongest position.
Assessing the impact of different scenarios
As you’ve seen, one key benefit of cashflow forecasting is to give you an idea of how different events could affect your finances.
You can split these into two categories:
- Those under your control, such as decisions you make or are thinking of making. This type of scenario planning can really add value to your decision-making.
- Those that you have no control over and can happen without warning. This can give you valuable peace of mind.
In each case, you’ll be able to see clearly how these potential events could affect your financial plans.
It can also help you take steps to correct any issues that such forecasts may flag up. For example, you may need to increase the amount payable to your family on your death, or you may want to pay more into your pension to secure the retirement you’re hoping for.
Planning your financial future can be difficult, but cashflow forecasting can help you sleep at night knowing you have a robust financial plan that you have complete confidence in.
Forecasting can support your planning in both the UK and Australia
As a financial adviser with a strong presence in both Australia and the UK, we’re very much aware of the benefits you can gain from cashflow forecasting.
For example, if you have assets in both countries, it can give you a clear overview of all of them in a single report. It means you pull together all your finances and look at them holistically.
Cashflow forecasting can also be a great help when used as part of the planning process before you decide to move from the UK to Australia, or vice versa.
Get in touch
We have a wealth of experience in helping clients with their financial planning, and cashflow forecasting forms an integral part of our advice process.
Get in touch to find out how we can help you.