What could cash flow modelling do for you?
The cost of sending one child to school in Dubai with a “very good to outstanding” British Curriculum, from FS1 to Sixth form, will cost you roughly 943,000 Dirhams, without considering inflation. However, when the cost of inflation is taken into account, this figure jumps to over 1.4 million Dirhams.
Today, a place for a child in a sixth form may cost 81,415 Dirhams for a year and with a 5% inflation rate in mind this doubles to 162,673 Dirhams by the time they leave highschool in 15 years – and then there is university to think about.
Do you know how much money you would need to send your 2 children to university in 20 years time? Do you know at what age you could retire and live comfortably? What if you decided to semi-retire and wanted to live a more extravagant lifestyle? Could you afford to buy a holiday home by the beach and go on multiple holidays abroad each year?
Here is how cash flow modelling can help answer these questions.
Cash flow models can paint a picture of your assets, income, expenditure, investments, and debts with a view to project what your future could look like.
The function of these models can be based on a framework that takes into consideration predicted growth rates, interest rates, inflation, life expectancy statistics, and salary increases. Assuming no catastrophes occur, simply put, it allows clients with their financial advisors to establish what their financial circumstances could look like in a given period.
Whether you are beginning your financial planning journey or looking at new investment opportunities, effective cash flow modelling combines financial planning with forecasting practices, what-if scenarios and traditional budgeting techniques. Aiming to provide founded expectations of future performance and enabling you to manage your cash flow accordingly.
A cash flow model should look to tell a story. The more detail you can give, the more accurate the picture becomes. Where you are, where you would like to go, what happens when life events occur; culminating in how your life story will end.
The benefits of cash flow modelling for clients
Cash flow modelling can bring value to both advisors and clients in real terms, whether the discussion surrounds debt management, planning for future life events such as a house purchase or retirement and even considering financial protection in a volatile market.
Where the power really lies is in planning for the future; your retirement journey, the sustainability of your assets, establishing what retirement could look like and the legacy you could leave to your nearest and dearest.
Perhaps the key aspect is the journey, and like everyone says while you are working – you have the money, but not the time. How do you ensure that in retirement you will have the money, now that you have the time? How can you maintain your current lifestyle, with all that the rising cost of living encompasses so that later you can sustain your retirement lifestyle goals. Perhaps enjoying a second home in the south of France with the grandchildren, taking the holidays you have always wanted to take while still continuing to visit the restaurants you love to eat at.
Seeing really is believing.
The ability to see what your financial position really looks like on paper can offer comfort for many. A 2020 Intelliflo survey found 67% of financial advice companies found cash flow modelling with clients helped to reduce clients anxiety during the pandemic, whilst 92% of those who were surveyed agreed cash flow modelling helped their clients understand the impact of significant market movement on clients future plans.
Does your cash flow model look good on paper?
For many, it will be a way to visualise assets, investments, debts, income and outgoings; and more significantly how your wealth could be affected over time or as a result of different events, tax liabilities and fluctuations in interest and inflation rates.
Whilst initially sitting down to plan out where your 3 year old is going to complete their education can seem overwhelming – especially if you have more than one. It is not just about picking the right school, cash flow models help you to visualise whether you can really afford the options you are looking at and how much you need to budget on a monthly basis to achieve this.
Not quite there yet?
Cash flow modelling tools can provide you with detailed information and tailored reports. They are based on a range of assumptions, how combined assets might be expected to grow over the coming years and should this all go to plan, how sustainable those assets will be at a projected rate of income withdrawal in retirement – how much income do you require to enjoy your golden years?
For example, you are in your early forties and would like to retire at 65. You have a retirement income expectation of $50,000 per year and to own your main residence. How do you get there? How much do you need to save on a monthly basis from now until your last pay cheque? Cash flow modelling can help answer this question, factoring in inflation to ensure you meet your monthly savings target.
Having seen the ideal picture, the road to retirement might now seem more realistic.
Yes, but what if?
What if you wanted to retire early, can you afford to do so? What if you took all your tax-free cash from your pension? What if you wanted to leave some money to your children? While more common scenarios that can be factored in, the list goes on – what if you developed a serious illness? What would you want to have happen to the lifestyle you are accustomed to? What if your other half passed away unexpectedly?
Do you have life insurance and critical illness cover to help ensure that you are financially protected to meet your monthly obligations.
The real importance of cash flow modelling
Finsbury Associates advocates a holistic approach to financial planning. A cash flow model, when used as part of the financial planning process, acts as a tool that enables these conversations and further discussions on how to react to such events, as well as presenting opportunities. What suitable recommendations can be discussed and implemented? What do those recommendations look like based on the life events or results – stress testing your plan to give peace of mind. For holistic financial planning please contact Finsbury Associates.