Even with the most efficient crystal ball, it’s impossible to predict the future. At the start of 2020, even Nostradamus himself would have struggled to predict a worldwide pandemic bringing whole nations to a virtual standstill.
Not knowing what will happen can make it difficult to plan for the future, particularly for long-term objectives like your retirement. Not knowing where you’ll be retiring, with potential differences in living costs and property, can also add another layer of uncertainty. Rather than just hoping everything will work out fine, you may want to consider using personal cashflow forecasting.
There are three key benefits:
- It can help you make informed decisions about your financial future.
- It will help you understand the impact of potential choices you face.
- It can act as a valuable aid in your financial planning process.
This means that you can face your financial future with confidence knowing that, if you are ever faced with an unexpected event, you will have a robust plan in place to deal with it.
How personal cashflow forecasting works
Modern personal cashflow forecasting involves you providing full details of your finances to a financial adviser.
This will include information about your income and expenditure, such as your monthly salary and any other sources of income, along with all your regular outgoings. Further consultation will help establish how your income and expenditure may change in the future and the timing of such changes.
Details of all your assets, including property, investments, pension assets and savings, along with your liabilities, such as outstanding mortgages and other loans, will also be required.
Other than your financial details, the adviser will also use certain variables that will have an impact on your financial situation. These will include:
- Annual inflation
- Life expectancy
- Salary growth
The adviser will then use specialist software to produce a bespoke report, or series of reports, that will illustrate potential outcomes for you.
They can then change the variables to see how they affect your forecasts. For example, they can create a scenario in which there is a period of high inflation, which could potentially mean prices rising at a faster rate than your salary and see how this could impact on your financial circumstances.
They could also create a scenario relating to your financial future, such as a change of employment, or the impact of you moving back to the UK from overseas.
It’s therefore important that you’re happy with the scenarios and variables your adviser has assumed, and that they are realistic in relation to your circumstances and aspirations.
The advantages of cashflow forecasting
Assuming the information the adviser inputs at the outset is accurate and comprehensive, there are many advantages to using cashflow forecasting as part of your financial planning process:
- It can give you a clear idea of what you need to do to meet your financial objectives, and raise any red flags about your current lifestyle and spending.
- It gives you a graphic representation of your situation and potential outcomes.
- It can build in life events, such as moving to a new country, changing job, or family costs such as university fees. It can also factor in unexpected events such as loss of income.
- It can be an invaluable tool to support your retirement planning. It can estimate whether you will outlive your retirement fund, how much income you’ll be able to take from your fund and how inflation could impact on your plan.
- If you are considering gifting as part of an inheritance tax and succession planning strategy, it can be very useful for ascertaining the affordability of making gifts.
- It can provide context around your wider investment strategy.
Probably most importantly, cashflow forecasting enables your financial adviser to help you put financial plans together for your future based on detailed information and projections that are unique to you and your circumstances.
The disadvantages of cashflow forecasting
The main drawback to cashflow forecasting can be succinctly summed up with a well-known expression from the field of computer technology: “garbage in, garbage out”.
That is to say, if the information put into the forecasting tool is inaccurate or incomplete, it makes the output equally inaccurate and unreliable.
For this reason, it is important to firstly provide as much accurate data as possible when starting the cashflow modelling process. Secondly, you should make sure your adviser understands what you want to achieve.
You should also ensure that you provide your adviser with up-to-date information regularly as your circumstances change.
Forecasting your retirement
Cashflow forecasting can be invaluable when it comes to your retirement. In particular, it can help to establish the date when you’ll be able to retire comfortably.
Deciding when to give up work can be a difficult decision. Stop working too soon, and you might find that your retirement fund depletes quickly, and you’re left in a difficult financial position in your later years.
On the other hand, if you are ready to stop work now, and can afford to comfortably support yourself and your family throughout a long retirement period, there’s little sense in delaying.
Cashflow modelling provides you with a way to understand when the time is right for you to retire, or if it’s not yet advisable to do so. Importantly, it’s not just for people for whom a secure retirement is uncertain. It is equally applicable for those who have clearly made their wealth, and need additional comfort that they can retire from the high demands of their career early and pursue other challenges that may be more personally fulfilling.
Regular reviews are crucial
Going back to the original point we made at the start of this article, no one can predict what will happen in the future. We can only make informed judgments based on the best information available.
That’s why it’s so important that the information being used for cashflow forecasting is up to date. Your financial, employment and personal circumstances will change, so it is essential that the details used for cashflow forecasting change with them and are kept up to date by yourself and your adviser.
We would strongly recommend you review your cashflow forecasts annually, so we can work with you to ensure you’re still on track to achieve your financial goals.
How we can help
We use sophisticated modelling tools to help you make informed decisions about your financial planning. If you want to find out more about cashflow forecasting, and how it can work for you, please get in touch.