When you’re making financial decisions, it can feel like you’re faced with indecipherable numbers. You might know how much you have in your bank account or pension, but what does the figure mean for your future? Cashflow planning can turn the numbers into possibilities.
If you feel uncertain about your future after looking at numbers on a spreadsheet, read on to see how cashflow planning could help.
Not understanding your finances could place your future at risk
It’s easy to make assumptions or use guesswork when you’re trying to understand your long-term finances. After all, it’s often complicated.
Take your pension, for example, when you’re calculating your retirement income. Not only do you need to consider its current value, but you might also need to include:
- The contributions you and your employer are making
- Compounding investment performance over decades
- The income you want in retirement and how it might change
- How long your pension will need to provide an income
- The effect of inflation on your income needs in retirement.
Using guesswork could mean your expectations for retirement don’t align with reality.
If you’ve incorrectly calculated that you can take a greater income, you could face a shortfall later in life. Alternatively, lack of clarity might mean you miss out on opportunities that were within reach because you’re being more frugal than necessary.
It can be difficult to understand what will be possible in the long term, or what effect the decisions you make today will have on your future.
Cashflow planning takes the numbers and creates a dynamic picture
The numbers are an important part of cashflow planning, but the output could be more useful. When working with your financial planner, you can use cashflow planning to create a dynamic picture of your wealth and how it might change.
To start, you’ll need to input the details the cashflow plan will use. This might include the value of your assets and spending habits. You can then make assumptions based on your circumstances, such as what investment returns you can expect each year.
The result is a visual model of how your wealth might change throughout your life.
It’s important to note that the result of cashflow planning cannot be guaranteed. However, it can provide valuable insight into how to use your assets and offer peace of mind.
Once you have created a tailored cashflow plan, it’s time to explore possibilities.
Cashflow planning lets you “test drive” different possibilities
Your cashflow plan can help you take control of your future by allowing you to “test drive” different options to understand what’s right for you.
Let’s go back to your retirement plans. At the moment, you might plan to work until you’re 60 and draw a modest income. A cashflow model could let you see the effect of retiring earlier or withdrawing a larger income at the start of retirement to tick off some of the bucket-list items you’ve always wanted to do.
You might find you’re able to achieve far more in retirement than you expected.
Cashflow planning can be useful at other life stages as well. You might use it to assess the effect of taking a sabbatical to explore the world in your 40s, or to see if you’re in a position to cover private school fees for your family.
Your cashflow plan can also be useful when you want to stress test your financial circumstances.
If you’re worried about how you’d cope should you need to take an extended period off work, or how the inheritance you leave for loved ones might be affected if you need support later in life, a cashflow plan could show you the effect. With this information, you can take steps to protect your plans.
By understanding all the possibilities and how to reach your goals, you might be able to achieve dreams you previously thought were out of reach.
While cashflow planning incorporates the numbers you see in your accounts, it’s about finding out how you might use your wealth to live the life you want.
Get in touch
Please contact us to discuss how we could work together to understand what’s possible for your future and how you might use your wealth to achieve it.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate cashflow planning.
