“What is personal financial modelling?”
When you’re making financial decisions, one of the challenges is understanding the impact on your long-term finances. Financial planning can help you weigh up both the short and long-term implications.
You may have heard the term “cashflow modelling” before but might not be aware of how it works or how it adds value. This short blog explains how it can help.
What is “cashflow modelling”?
In short, cashflow modelling can be used to make sense of your financial future. It can help you understand how your wealth and income may change over time, whether that be 5 years ahead, or 30. It’s a way of answering questions like: “How much should I be saving each month?”, “When can I give up work?” or “How much can I afford to spend in retirement?”.
The first step when using cashflow modelling is to capture all of your relevant personal information. This may include how much you have saved in your pension, your current income, or the size of your mortgage. It’s important these figures are accurate as they provide the foundations for calculations.
Once we’ve input your information, we then decide on reasonable assumptions for future variables, such as:
The annual return on your investments.
The average rate of inflation.
How much you plan to save and contribute to your pension.
Your future spending patterns.
Of course, we can’t guarantee that these assumptions will play out in reality, but they can help build a clearer picture of how your finances may evolve over time. This information will allow you to make informed decisions and start planning for your future (rather than just hoping for the best!).
Making informed financial decisions
Financial decisions often seem complicated and can have huge implications, both for your finances and resulting lifestyle. Without careful analysis, there’s a danger you may take the wrong option ( or more likely, do nothing at all!). Cashflow modelling can be used to forecast the outcome of different financial choices, for example:
Can I afford to take a lump sum from my pension to travel now?
Would providing a financial gift to my children now affect my future?
Can I take a larger income from my pension and still have enough for the rest of my life?
Cashflow modelling can help put the decisions you’re making into context.
For example, if taking a lump sum from your pension to travel now meant a lower income in the future, would you do it? For some, travel will be a priority that means a lower long-term income is worth it. For others, scaling back travel plans would make more sense. Understanding the implications of your decisions can mean you make an informed choice.
Planning for the unexpected
Cashflow modelling can also help you prepare for things that are outside of your control.
You may, for instance, worry about how your partner would cope financially if you passed away. Cashflow modelling can help improve your understanding of this scenario and show what steps you can take to provide security.
For example, it can help you understand “How much life insurance do I need to protect my family?”. So rather than insuring an arbitrary amount, you can ensure your cover meets your needs, whilst minimizing your insurance premiums.
Alternatively, you may want to understand whether your retirement would still be on track if your investments didn’t deliver the expected returns. Or whether you could afford to pay for care in your later years.
These types of scenarios can be difficult to think about but being proactive and understanding ‘worst-case scenarios’ can provide peace of mind and ensure you’re better prepared when the unexpected happens.
Get in touch
If you’d like help making sense of your financial future, please contact our independent financial advisors, near Bath.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested.
