The Austrian-American management consultant, Peter Drucker, once said: “The best way to predict the future is to create it”.
From the Oracle of Delphi to the astrologer Nostradamus, throughout history people have sought out those who might be able to predict the future to their benefit. They have often turned to supposedly supernatural means such as water divining, astrology, oneirology, tarot cards, or simply having someone glance into a crystal ball to tell their fortunes.
In modern times, predicting or “forecasting” the future remains, but those who are looking to make major decisions, especially financial ones, typically rely on data and evidence to provide them with an informed outlook.
This more scientific approach is a key part of the process of cashflow modelling, which can help your clients prepare for their present and future needs.
Read on to discover what cashflow modelling is and three useful ways it might help your clients to achieve their long-term plans.
Cashflow modelling provides your clients with a road map towards their long-term goals
Financial planning aims to help your clients understand how much they’ll need to unlock their desired lifestyle and long-term retirement goals. Once we understand those aims, we can develop a plan, aligned to a client’s tolerance for risk, that works towards getting them there.
Cashflow modelling plays a vital role in the financial planning process by providing detailed forecasts of your clients’ current and future financial situation, such as their:
- Income versus outgoings
- Net worth
- Tax obligations.
Once all your clients’ key information has been recorded, we are able to use software to project future outgoings, the value of future assets, income requirements, and the growth needed to meet them.
Cashflow modelling allows us to tailor any plans towards meeting your clients’ specific needs or objectives, and can help us answer key questions, including:
- When can I afford to retire?
- How long will my savings last?
- How would my financial situation be affected by an unexpected event, such as a period of ill health?
- Can I afford to leave a financial legacy for my loved ones?
- What would happen to my finances if I needed long-term care?
The answer to these questions can help inform any steps taken with your clients’ financial plans in the short term and can help shape the forecast for their futures.
3 clever ways cashflow modelling can help secure your clients’ futures
1. It can help identify inefficiencies in your clients’ budgets to help make vital savings
The first step in developing a cashflow model is to do the necessary due diligence and input as much detail as possible on your clients’ current financial situation.
This may include:
- Current income
- Investments or assets they hold
- Savings
- Pension contributions
- Protection premiums
- Essential outgoings such as rent/mortgage payments or utility bills.
Your client may have their savings stored in an account with relatively low interest rates and without the boost of tax relief benefits associated with vehicles such as ISAs.
They may benefit from increasing their pension contributions and potentially reducing the amount of Income Tax they pay.
Additionally seeking out better deals for protection and mortgage rates could result in valuable savings.
There is no guesswork involved or “cold reading” a clients’ background. We aren’t staring into the mystical void trying to pull together vague insights into their issues.
Remember: cashflow modelling relies on hard data and evidence to understand your clients’ current outlook.
2. It can prepare your clients for unexpected challenges or major milestones
Cashflow modelling is especially helpful when projecting the potential effects of any future changes to your clients’ plans. It can allow their adviser to help them explore future scenarios and how they might affect their financial position.
These potential “what if?” eventualities might include unexpected challenges — like those faced in recent times during the pandemic and cost of living crisis — or major milestones that your clients are expecting to occur, such as:
- Their target retirement date, whether it is delayed or brought forward, and how they decide to draw their pension income
- Moving homes or relocating abroad
- Providing for children or grandchildren’s educational expenses
- Gifting money to children or grandchildren to help with marriages or first homes
- Additional healthcare costs during retirement
- Caring for a loved one unexpectedly.
There is no way to guarantee future outcomes, but cashflow modelling can help your clients to plan for the financial ramifications of major life events – both positive and negative.
3. It can project your clients’ long-term wealth requirements and the best way to reach them
According to the Association of British Insurers (ABI), nearly 10 million Brits are simply saving too little to provide for their eventual retirement needs and are facing a potential income shortfall.
Cashflow modelling goes a long way towards mitigating any long-term financial issues and helps your clients determine exactly how much wealth they’ll need to generate to unlock their desired lifestyle and level of retirement comfort.
Once clients and advisers are in agreement on the long-term growth required, a strategy can be developed to build these funds patiently over time.
At Grey Parrot, one way we seek to do this is through evidence-based, passive “buy-and-hold” investing.
This method uses historical data and trends, and the latest research, to make informed investing decisions. It helps to develop a diversified portfolio with the aim of retaining investments over the long term and ignoring any short-term fluctuations.
This can reduce both associated risk and costs for your clients, as well as freeing up more of their valuable time to focus on the important things — their lives and their goals.
Read more: What can the story of Billy Beane teach your clients about the benefits of evidence-based investing
Unbiased reports that financial advice could help individuals improve their circumstances by nearly £5,000 each year.
While the future is never certain, cashflow modelling and evidence-based investing can help ensure your clients are as safe and secure as possible.
Get in touch
The recent news cycle has caused concerns for many Brits and prompted them to ponder their potential future. If you or your clients are worried about your long-term plans, you should contact us by email at info@grey-parrot.co.uk or call us at 02039 871782.
Please note
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.