Going with the (cash) flow

How does cashflow modelling work and why do financial planners use it?

Nick: In a nutshell, cashflow modelling involves using a piece of specialist software to create a projection of your future finances, using details of your income, outgoings, savings and financial goals.

Dominic: When I first meet my clients, most of them are anxious about their future finances. They’re not sure whether they will achieve everything they want to. Cashflow modelling brings their money to life – we can see how their finances could pan out in the future and look at different scenarios.

What are these potential scenarios?

Dominic: Life throws up unexpected events such as ill health, redundancy, a new job or a new child. Each can have an impact on someone’s financial future. I revisit each client’s cashflow model at their annual review so they can then see what effect these changes could have and whether they are still on track to meet their objectives.

Eliana: We also look at what would happen if the market took a downfall. Everybody still remembers 2008/09 when the markets fell about 30%, so if something similar happened again, clients want to know what would happen to their income and portfolio.

Bruce: We tend to be cautious on our figures when we run through these scenarios. We won’t assume much growth, but will assume a lot of inflation, because we want to leave room to manoeuvre.

Nick: But it’s not all doom and gloom! A lot of the time clients want to know how happy future events could affect their finances or if they are on track to be able to afford them – for example, going on a world cruise or paying for their child’s wedding.

Can cashflow modelling make an immediate difference to a client’s life?

Eliana: Absolutely. A few years ago, one of my colleagues showed a client his cashflow and said ‘you could retire tomorrow if you wish’. He said ‘I will’ and picked up the phone and retired on the spot!

Bruce: I have a client who was worried about how much they could spend on their immediate family and enjoying themselves without worrying they are going to run out of money. After I ran through their cashflow model, it was clear that they could easily afford to maintain their current level of expenditure with a significant margin for both fun and safety. It turns out that they just needed to see their finances and future projections on paper to get peace of mind – you could actually see them physically relax during the meeting.

Nick: My client’s wife was recently diagnosed with a horrible form of arthritis and he doesn’t have private medical insurance so she’s on the NHS waiting list. He needs £10,000 to pay for her treatment, so I used cashflow modelling to show how we could make it work and was able to assure them that it wouldn’t affect their longer-term finances. It’s still a nasty thing to go through but at least their finances are one less thing to worry about.

What happens if there is a shortfall?

Dominic: Occasionally I need to have frank conversations with clients about how realistic their goals are, but most people welcome these honest discussions as it allows them to better plan for the future. I can then make practical recommendations to give them a far better chance of meeting their goals, whether they are on track or not.

Eliana: We sometimes say an extra few years of working brings some extra comfort to your retirement. If you’re having a tough time at work, knowing that the extra few years can bring this much extra comfort in retirement may make them that little bit easier.

Bruce: If this happens, I find that most of my clients would rather take a bit of pain now when they have the choice and continue working. They’ll postpone their retirement so that they have a bit of a cushion and are much more comfortable when they stop working.

They might ask, ‘if I could tighten my belt and save £1,000 extra each month for the next two years towards retirement, what would that do?’ And we can show them how much extra income or tax-free cash they could enjoy. Most of my clients are willing to take that challenge if, firstly they can see the finish line, and secondly, they know what the difference is going to be.

Would you like to find out more about how cashflow modelling and how it could help you plan for a better financial future? Download our short cashflow modelling guideor contact us on 020 7189 2400 or contact@tilney.co.uk.