The right cash flow planning tool combined with the right financial planner makes a powerful combination
Financial planning is all about achieving the financial future and lifestyle you want. Cash flow planning plays a big part of that here at Juno Wealth. So, we thought it would be helpful to have a closer look at what it involves and some of the pros and cons.
A glimpse of the future – cash flow planning in a nutshell
Good cash flow planning software will allow you to predict the state of your income, assets and expenditure at any given time in the future. It can also factor in unexpected events: the death of a loved one, divorce or critical illness, allowing you to ensure you’ll still be financially comfortable even if the worst does happen.
It allows you to work out whether you can afford that large expenditure (a new conservatory or once in a life time holiday, for example) and what effect your current level of expenditure will have on your future assets. It even helps you to calculate when you can retire, whether your pension will be enough and what you need to do to make sure it is.
It often sits at the very heart of your financial planning strategy, allowing you to set goals and plan towards them. So, with so many advantages, are there really any cons and if so, how can you safeguard against them?
The right software and financial planner
It may sound a little trite but your cash flow planning is only as good as the software you use, the information you feed it and how the data is interpreted. There are many different tools available but without a solid set of data behind them, intelligent interpretation by your financial adviser and the right information provided by you the client, they can be very unreliable.
To that end, online cash flow planning tools whilst tempting, at best provide little more than a starting point and at worst, provide an inherently unreliable prediction. And reliance on such, could significantly derail you from your long term financial plan.
Even if you’ve gone to a financial adviser, you still need to check that they’re using the very latest software and technology and that they really have invested in the skills and capability to operate the software to its full advantage. A key thing to look out for; does your financial planner develop your cash flow plan with you live, face to face, in an interactive meeting and explain the limitations of the cash flow model along the way?
Predictions based on assumptions
It’s fair to say that rates of growth, interest rates, tax laws and inflation rates are likely to change and so too is your lifestyle and levels of expenditure. A good cash flow plan will be based on many years of data to help ensure more accurate predictions, will take into account sequencing risk and will treat different assets in different ways (not just apply a blanket rate of growth).
You should be asked to supply a detailed account of expenditure and your cash flow model should not be set in stone but should be subject to regular reviews. Ask your financial adviser or financial planner about any assumptions that have been used and make sure you understand what is presented to you.
It goes without saying that at Juno Wealth, we have state of the art cash flow modelling software which we combine with our evidence based, sensible approach to investing. And it’s all subject to our annual review service.
It’s not just about numbers
As cash flow modelling is primarily used to help you achieve your goals, it means that it’s not just a numbers game. Accurate cash flow modelling means your financial adviser needs to spend time with you identifying what your long-term goals are and that of course, means digging a little deeper than just deciding you want to retire at 65. You cannot eliminate that human element to the process.
Your cash flow predictions should also of course take into account your personality, and what is known as your attitude and capacity for investment and risk. At Juno Wealth, we combine our cash flow planning with a market leading psychometric questionnaire so that we really have the full picture and a thorough understanding of you.
Used well, cash flow planning is an immensely useful tool and provides valuable insights. The software we use can be projected on to a large screen and is very easy to understand. It makes for a memorable and often comforting experience, being able to see your future mapped out and it provides a focus to our planning conversations. But the success of your cash flow plan will always depend on the quality of the software combined with accurate data and the skill of your financial planner.