In its most basic form, cash flow planning illustrates the effect income and expenditure have on your financial plan, in the short, medium and long term. There are various tools available, from Excel spreadsheets to dedicated comprehensive graphical software.
As a client, your goals and aspirations are at the heart of everything we do. In any circumstance, cash flow planning is designed to consider your objectives and decipher the likelihood of achieving them.
Case studies: the relevance of cash flow at two life stages:
- In your 40s: Protecting wealth and planning for the future
Tony and Sarah inherited some money and invested it without advice. The plan was to withdraw a sensible amount to pay for luxuries they wouldn’t otherwise afford. This would also leave a lump sum for Sarah to use as retirement income. They hadn’t reviewed their regular withdrawals and were concerned their investment value was being eroded.
They didn’t fully understand their current levels of income and expenditure; comprehensive factfinding and cash flow planning highlighted that they were living beyond their means. (You may be surprised by the number of people blissfully unaware of their regular commitments.)
They are now withdrawing a realistic and sustainable income, meaning they can enjoy life and make provision for retirement. Their financial affairs and cash flow are reviewed on a regular basis and tweaked as necessary, to ensure they remain on track.
- In your 60s: Retiring early to enjoy life
Neil and Susan were teachers who both took early retirement; they were five years from their State Pension. They had excellent final salary pensions, from which they had taken lump sums of £150,000.
They soon realised that their teacher’s pensions weren’t sufficient to meet their lifestyle; they needed additional income until their State Pension was available.
We recommended that they invest £80,000 into ISAs over the course of two tax years, allowing them to withdraw an income until their State Pension commences. Simple cash flow planning backed up by sound investment recommendations enabled this. Again, regular reviews ensure it remains relevant.
Cash flow is especially helpful in retirement planning, indicating the level of saving required for the post-career lifestyle you desire. It also provides the ability to pre-plan for scenarios, such as:
- The loss of an income source
- The impact of large purchases
- Unexpected costs, such as long-term care
- Gifting to family and friends
- Downsizing property
- Untimely death
Assumptions and limitations
Inherently, future planning requires several assumptions, for example:
- Your lifestyle and spending habits
- Your health and lifespan
- Your attitude towards investment risk
- Expected investment returns
- The level of inflation and potential tax liabilities
The term “garbage in, garbage out” was coined by mathematicians in the late 1950s, during the early days of computer programming. It’s still very relevant today; if you put the wrong data in any analytical software, you can’t expect the correct result at the end. Cash flow planning is the same.
From the outset, you must be honest and realistic with your adviser. It’s their job to then properly interpret your answers and accurately reflect them in your cash flow plan. The relationship must be built on clear, frequent communication; without a solid set of data, cash flow plans are often very unreliable.
Regular reviews are absolutely necessary; cash flow is not a static plan and will require constant evolution, as your personal circumstances and priorities inevitably change throughout life.
Is cash flow the future?
Cash flow planning is no substitute for well-considered advice but can be very powerful in helping you visualise recommendations shaping your financial future.
Cash flow plans absolutely shouldn’t be relied on in isolation and be taken with a metaphorical pinch of salt; they are only ever as accurate as the information input and educated assumptions made.
Regular reviews are imperative, which is no bad thing. A healthy relationship with your adviser ensures you maximise planning opportunities and minimise potential risks.
Financial planning is more than numbers; it’s understanding people, their emotions, risk tolerance and aspirations. Something planning software alone is, to date, incapable of.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.