There are many approaches to creating a good savings and investment strategy. Yet in our experience at Vesta Wealth, our clients often gain the best perspective when they see a visual depiction of where their finances could be in 5, 10 or more years. Once it becomes clear how your plan in the present opens up opportunities for you in the future, it is easier to begin tying together the different parts of your financial plan together to work for a common goal.
This article by our Financial Planners shows how this works with cashflow modelling, and contrasts this with the idea of cashflow forecasting. The aim is to inspire you to explore creating a sound cashflow plan with an experienced financial professional. We hope you find this content useful and invite any questions you may have, via:
t: 01228 210 137
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Cashflow forecasting vs. cashflow modelling
One of the legitimate criticisms of cashflow modelling is that nobody can accurately predict the future. It is impossible to foretell where your finances, savings and investments will be in just a few months’ time, let alone years. This is a legitimate criticism, perhaps, of cashflow forecasting, which implies at least a strong degree of certainty on the part of your Financial Planner regarding your financial position in the future.
Cashflow modelling, however, does not seek to predict the future. Rather, it sets out a range of potential scenarios regarding your wealth and finances – each one varying slightly, depending on certain factors or variables transpiring. The point of the exercise is not to assign a statistic regarding the probability of each scenario, but rather to establish a contingency financial plan for each one so that you are ready for each one, should they occur.
Cashflow modelling in practice
So, what does this ‘scenario setting’ look like during the financial planning process? Some examples might help. For instance:
- Scenario A. Here, your pension contributions remain at 5% of your salary throughout your career – over which, your earnings do not increase significantly (due to staying within a particular profession or role). This scenario shows a pension pot estimated at £100,000 in today’s money by the time you reach age 65.
- Scenario B. Under this scenario, you change careers and significantly increase your annual income until you retire. You also increase your pension contributions to 15% of your salary, resulting in a pension pot of about £500,000 by the age of 65.
- Scenario C. This scenario imagines what might happen if your spouse or partner died in the future, cutting your household income in half. Without financial protection, this results in a big reduction in pension savings which undermines your desired retirement lifestyle.
- Scenario D. You build up a strong pension pot which is projected to sit comfortably within the current Lifetime Allowance (i.e. £1,073,100 in 2020-21). Yet the tax rules change in the future due to legislation from a new government, which imposes a penalty on pension savings over a certain threshold. How might you plan for this scenario and minimise the potential damage to your nest egg?
As you can see, some of these scenarios are happier than others! None of them is certain to happen, yet the fact that they could happen helps you to prepare. What would happen to you in Scenario C, for instance, if you now put in place an effective financial protection policy, with the help of your Financial Planner? Or, how might Scenario A be affected if you increased your workplace pension contributions?
Going beyond a budget
It is quite likely that you already have a monthly budget and possibly a short-term savings goal. Perhaps you are hoping to get on the housing ladder soon, for instance, and steadily building up your deposit. Yet as important as this is, your budget could be integrated into a much smarter, more comprehensive financial plan using cashflow modelling.
One great advantage of cashflow modeling is that it helps to encapsulate the facts about your present financial situation – and where your behaviour and choices might take you in the future. It’s possible to do some cashflow modelling yourself, of course. Yet there are so many variables and complex calculations involved that it is much better to make use of the software and insight of an experienced financial planner when conducting this exercise.
Not only will this person be able to show you whether your assumptions about your present situation are accurate; they will also help you ascertain whether your future goals are realistic. This, in itself, is tremendously valuable, potentially saving you a painful, harsh wake-up call in 5, 10 or 15 years’ time when too much ground may have been lost to correct your course.
Invitation
If you want to start a conversation with us about your financial plan and investment strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth. Reach us via:
t: 01228 210 137
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.