An introduction to Personal Cashflow Planning…

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Here at Masterplan, we are proud of the fact that we can not only offer our clients a solution to their business needs, but we can offer a solution to any personal financial needs as well.

While the Masterplan Lending Advisors team has a plethora of Financial Services experience at our disposal, we tend to focus our efforts solely on the provision of a commercial finance broking and private equity placement.

This is because we are fortunate enough to be part of the wider Masterplan group, which contains Masterplan Finance (Mortgage Specialists) and Masterplan Wealth (Financial Planning Specialists). This gives us the ability to provide a holistic solution to our clients, with Masterplan Wealth proving to be especially well received.

I’m therefore going to tell you a little bit more about how Masterplan Wealth might be able to benefit you and your family…

Over the past few years, one particular part of the Financial Planning seems to peak the interest of people a lot more than others. That part I’m talking about is called ‘Cashflow Modelling’.

Traditionally, when we think of cashflow, we can be immediately drawn to thinking of it purely from a business perspective; periodically reviewing / assessing cashflow, ensuring cashflow is sufficient to keep the business running, or perhaps using commercial finance services to improve cashflow. Nowadays though, more and more are we seeing the cashflow take on a whole new meaning when it comes to clients’ personal finances.

In fact, some would argue that this personal perspective has perhaps become more prevalent in recent years – even more so in the times we are living through currently; the experiences of periods of furlough, the threat, or indeed, the reality of redundancy as well ill health, as a result of the covid -19 crisis.

With these additional factors in play, we’ve certainly seen an uptick in enquiries whereby people are expressing an increased awareness and concern regarding their financial situations, with a specific-yet-broad objective of simply wishing to plan properly for their futures. The remarkable thing for me about this though is the number of younger people – a demographic traditionally underserved by the advice profession – making these sorts of enquiries. It’s almost like they have become aware of the fact they should be doing something with their money, but they don’t have much of an idea where to start.

This is where Cashflow Modelling comes in (or, for the sake of this article), Personal Cashflow Modelling.

It’s worth quickly mentioning that if you’re in the Financial Services industry, this won’t be a new concept for you; Personal Cashflow Modelling has been around for a couple of decades. In my opinion though, the value it adds to an individual’s financial plan is still massively underrated by consumers.

Personal Cashflow Modelling is a detailed picture of an individual’s assets, investments held, outstanding debts, as well as a picture of their income and expenditure. This data is then projected forward, year by year, using a series of assumptions; such as potential rates of growth, future income & expenditure levels plus estimated future inflation, and interest rates.

If you’re familiar with these kinds of processes for your business, you’d be forgiven for thinking that this personal approach sounds much like some of the cashflow forecasting you may do in your organisation? …

… And you would be correct! Cashflow Modelling, in the personal sense of the term does use similar principals as traditional business modelling does; and then it simply applies them to an individual. By factoring in significant life events up to, including and, indeed, following their retirement, an adviser can effectively put together a personal ‘exit strategy’ for their client… only the exit is from their career rather than a business.

For instance, while traditional cashflow forecasting can allow you to project how a company’s incoming revenue stream and regular costs / credit commitments will affect it over the coming few years, a personal cashflow model does a similar job, but perhaps over the coming few decades.

As financial planners, cashflow modelling is an important tool because it gives us the ability to understand and convey the consequences of the choices made by our clients today; not just one or two years into the future, but five, ten, twenty, sometimes fifty years into the future.

Cashflow modelling enables us to answer in ‘pounds and pence’ such questions as:

‘if I want to retire at 60 instead of 67, how much more will I have to start saving into my pension each month?’
Or ‘
“if I want to pay for my children to support them whilst at University, so they can focus on their studies, how much should I be saving?’

This means we can provide clients with a tangible framework that they understand, which is important, along with something they can actually work towards, too. A financial road map, if you like.

As well as aiding the clients’ ability to understand their own financial plan, and the decision-making process that goes into putting it together, cashflow modelling also provides Financial Planners with the ability to show how robust the financial plan they are recommending is.

Advisers use ‘stress tests’ to understand how a plan would fare in the event of a Market Crash (replicating events such as the 2008 financial crisis for instance) or whether there would still be enough left in the coffers if the client were to live on to the age of 100 or more, as another example.

As with any forecast or prediction it is always important to remember that the basis will always be built upon certain assumptions about future events – which needs to be in mind and relayed when discussing the outcomes of personal cashflow modelling.

It is especially important that both advisers and the clients understand that the process has limitations, there is no denying that the introduction of cashflow modelling (as a personal as well as business tool) is helping Financial Planners all over the world make more informed recommendations and, in turn, allowing clients to make better decisions for their future.

If you are interested in having a conversation with Masterplan Wealth, please don’t hesitate to get in contact today and we will arrange an initial consultation on your behalf.