Introduction
In this article, Kate Evans explains what cashflow modelling is, how it works, and the ways it can keep your financial plans on track—even as your goals and circumstances change.
Cashflow Modelling Explained
Cashflow modelling is a financial planning tool that helps you forecast and manage your future income and expenses over time. By using assumptions about factors like earnings, savings, investments, inflation, and expenditure, cashflow modelling can give you a clear picture of how your finances may look in the future. The model provides insights into your financial health, allowing you to see if you’re on track to meet goals like retirement, major purchases, or funding education. Cashflow models are highly adaptable, accommodating a variety of scenarios, and are a powerful way to make informed financial decisions.
How Does Cashflow Modelling Work?
Cashflow modelling works by taking your current financial data—such as income, expenses, savings, and investments—and projecting these over future years based on specific assumptions. A financial planner or software can adjust for factors like inflation, investment returns, and life events to provide a realistic forecast of your cashflow over time. The model calculates expected income and expenditure, showing you when you might run a surplus or a deficit. Visual tools, such as graphs, often accompany these models, giving you an intuitive way to see how your finances will evolve under different scenarios.
When is Cashflow Modelling Used?
Cashflow modelling is typically used during major life or financial planning events, such as:
1. Planning for Retirement
Cashflow modelling is invaluable for retirement planning, as it projects whether your current savings and investments will support your desired lifestyle in retirement. By factoring in income sources, living expenses, and potential healthcare costs, cashflow models help you understand if adjustments—such as increased savings or delaying retirement—are needed. It can also account for state pension and private pension income, helping to ensure that you won’t outlive your savings.
2. Preparing for a Major Life Event
Significant life events, such as buying a home, starting a family, or funding a child’s education, can have a major financial impact. Cashflow modelling helps you anticipate and budget for these events by evaluating the affordability and timing of each goal. For example, if you’re considering buying a property, a cashflow model can show how mortgage payments will affect your long-term finances and whether adjustments are needed in other areas, like discretionary spending or retirement savings.
3. Managing Career Changes or Early Retirement
Whether you’re thinking of changing careers, taking a sabbatical, or considering early retirement, cashflow modelling can assess how these choices will impact your financial future. By running different scenarios, you can see how a reduction in income or a change in contributions to retirement funds may affect your savings goals. It allows you to make informed decisions about career moves with a clear understanding of the long-term financial implications.
4. Addressing Unexpected Financial Shocks
Life can bring unexpected events, such as a health crisis, job loss, or major home repair. Cashflow modelling can help you prepare for these by showing the effects of emergency expenses on your financial plan. It allows you to explore how your cash reserves, insurance, or liquid assets can provide a buffer against such shocks, reducing the risk of long-term financial strain. Regularly reviewing your cashflow model can also ensure that your emergency fund remains adequate as your life circumstances evolve.
5. Estate and Legacy Planning
Cashflow modelling is a useful tool for those who wish to leave a financial legacy or ensure their estate is well-structured for their family’s benefit. It can illustrate the impact of gifting, charitable donations, or transferring wealth on your own retirement security, ensuring that you don’t compromise your own needs while supporting your loved ones. Cashflow modelling can also project potential inheritance tax liabilities, helping you create an estate plan that efficiently transfers assets while minimising tax obligations.
Regularly reviewing your cashflow model, especially after significant financial or life changes, can help ensure you stay on track to meet your goals. Kate Evans, Chartered Financial Planner at Lucent
How Can Cashflow Modelling Help Me?
Cashflow modelling can provide clarity and peace of mind about your financial future. By seeing a detailed forecast, you can confidently plan for major expenses, set realistic savings goals, and identify potential financial shortfalls. It also allows you to assess the feasibility of your retirement plans, helping you determine if you’ll have sufficient income throughout retirement. If gaps or risks are identified, cashflow modelling provides a proactive framework to make adjustments, such as increasing savings, reducing expenses, or investing differently. Ultimately, it empowers you to make informed decisions, knowing how they’ll impact your long-term financial health.
Are Your Future Financial Plans on Track?
Cashflow modelling is an effective way to evaluate whether you’re on track to meet your future financial goals. By reviewing the model’s projections regularly, you can assess if your savings rate, investments, or spending habits align with your objectives. It allows you to identify any gaps early and adjust your strategy to stay on course. Whether you’re aiming for an early retirement, funding a child’s education, or leaving a legacy, cashflow modelling provides a clear picture of your financial health, so you can make adjustments as needed to achieve your aspirations.
What Information is Needed to Provide an Accurate Cashflow Model?
To create an accurate cashflow model, you’ll need to provide your financial planner with detailed information on your current finances. This typically includes (but is not limited to):
- Income Sources: Details on all income streams, including salary, bonuses, dividends, rental income, and any other revenue.
- Monthly and Annual Expenses: A breakdown of regular expenses, such as household costs, debt repayments, discretionary spending, and insurance premiums.
- Savings and Investments: Information on current savings accounts, ISAs, pensions, and other investments, along with contribution amounts.
- Debts and Liabilities: Details on outstanding debts, including mortgages, loans, and credit card balances, plus interest rates and repayment terms.
- Lifestyle Goals and Major Planned Expenses: Expected costs for significant events or purchases, such as travel, a new property, education, or weddings.
What are the Most Common Causes of Cashflow Problems?
Cashflow problems can arise from a variety of sources, such as unexpected expenses, loss of income, or poor financial management. Common causes include inadequate emergency funds, high debt levels, lifestyle inflation, and underestimating expenses. For business owners, income fluctuations or delays in receivables can create cashflow issues. Cashflow modelling can help you identify potential problem areas in advance, allowing you to create strategies to mitigate them. By planning ahead, you can build up emergency savings, adjust spending, or explore income diversification to avoid common cashflow pitfalls.
What if My Plans Change?
One of the strengths of cashflow modelling is its flexibility. Life circumstances and financial goals often evolve over time, and cashflow models can be adjusted to reflect these changes. If your retirement goals shift, you decide to purchase a property, or you experience a significant change in income, the model can be updated to show how these factors impact your financial future. This adaptability ensures that your financial plan remains relevant and responsive, helping you stay on track even when your circumstances change. Regular reviews of your cashflow model can keep your strategy aligned with your goals.
The beauty of cashflow modelling is its adaptability. As your circumstances or goals shift, you can update the model to reflect these changes, keeping your financial plan responsive and aligned with your future. Kate Evans
Can I See an Example?
Seeing an example of a cashflow model can provide valuable context for how it works. A typical cashflow model might illustrate a family’s income, expenses, and investments projected over a 30-year period. Visual tools like graphs often show the relationship between savings, investments, and spending, indicating any potential shortfalls or surplus funds. For example, an example model might show how a couple’s retirement savings will be impacted if one spouse retires earlier or how additional investment income can extend their financial security. Reviewing examples can help you understand the practical insights cashflow modelling offers and how it might be applied to your own situation.
Summary
Cashflow modelling is a powerful financial tool that provides clarity on your financial future, helping you make informed decisions for both immediate and long-term goals. By projecting income, expenses, and potential scenarios, cashflow models allow you to assess whether your plans—like retirement, major purchases, or legacy goals—are on track. This flexibility ensures that, even as life changes, you remain prepared and adaptable. Whether you’re looking to achieve a secure retirement, handle unexpected costs, or manage significant life events, cashflow modelling offers the insight needed to stay financially resilient and focused on your future.
Disclaimer: This article does not constitute financial advice. We recommend that you speak to a qualified financial planner for advice tailored to your individual circumstances and goals. Financial markets may go up or down, and you are not guaranteed a return on your investment. Past performance is not necessarily a guide to future performance.
