Cash flow planning is a forecast that enables you to see your financial position year by year. It takes into account several factors, such as as your expenditure, the rate of inflation, investment returns and tax rates.
The outcome of the forecast is key to understanding what you can achieve with your wealth and forms the basis of your financial plan. It allows your financial planner to predict your future cash needs, help you set achievable financial objectives and, if required, warn you in advance if you are likely to run out of money.
The core components of a financial plan
We consider the key attributes of a financial plan to include:
- Objective setting
- Asset management
- Tax planning
It is crucial to undertake periodic reviews of your financial plan, so that any changes can be taken into account and your cash flow forecast can be re-modelled to ensure you are still on track to achieve your financial objectives. Common financial objectives include:
- Early retirement
- Comfortable retirement income
- Funding later life care
- Assisting younger generations with education costs and/or house deposits
- Legacy gifting
How can cash flow planning help you?
There are several benefits of cash flow planning, as listed below.
Peace of mind
You will know that your finances are in order and that you are on track to achieve your financial objectives within your timescales.
Within your forecast, your financial planner will factor in realistic assumptions. This will include potential unforeseen events and acts as a contingency for planning purposes.
You will be able to distinguish between your ‘essential spending’ and ‘non-essential spending’ and adjust accordingly. Of course, this is relative and you should decide what spending falls into each category.
Identifying any shortfalls
If your forecasted financial position will not allow you to achieve your objectives, this will be identified. Your financial planner will then help you to make suitable adjustments.
Planning an affordable savings strategy
The forecast will help you to identify what disposable income you have after your spending is considered. From this, you can save what you consider to be affordable to you and over a timescale you feel comfortable with.
Clarification on future objectives
The analysis will enable you to see whether your financial objectives are realistic, based on your financial circumstances at the time and those forecasted in the future. If your objectives need amending, your financial planner will assist you.
To achieve your objectives in the most tax efficient manner, you may need to reallocate or diversify your assets. This will be identified within your cash flow forecast.
Cash flow planning outcomes
Typically, there are two outcomes of cash flow planning:
1. You have a surplus of assets
In this instance, you could consider:
- Early retirement
- An enhanced lifestyle
- Minimising any potential Inheritance Tax (IHT) liability on your estate
- Reducing the risk associated with your investment portfolio
2. You have a shortfall of assets
Here, you might need to reconsider:
- If your scheduled retirement age is still achievable
- Whether your current rate of saving will help you achieve your financial objectives
- If your current investment portfolio and risk tolerance will lead to you achieving your financial objectives
- Reducing your expenditure
- Your financial objectives entirely
It is important to remember that the benefits of financial planning are relative and, therefore, your financial objectives and overall experience will be unique to you.
A good financial planner will never tell you how to spend your money, but instead show you what you can achieve with your wealth and make suitable recommendations when required. Sometimes adjustments need to be made to achieve financial security, but you should always have the final decision.
To find out more about cash flow planning and how it could benefit you, download our guide below.
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