When thinking about your financial future, it’s tricky to grasp the many different scenarios that might play out in your life and the impact they’ll have. To help clients visualise these scenarios and to bring clarity to long-term planning, many financial planners use 'cashflow modelling’.

When it comes to financial planning, it’s essential to consider not just your current financial situation, but also what it might look like in the future. This opens up a seemingly endless list of questions which may (at first glance) not have clear answers.

For example, you might live well into your 90s – or even beyond 100. Will you have enough money to last you that long? Do you plan to retire early? Are you expecting to support your loved ones with their own financial goals? And what about long-term care in later life? It’s a lot to consider.

The decisions you make today can profoundly impact your financial security many years down the line. Thankfully, there are ways to predict the potential impact of various scenarios and begin putting appropriate plans in place.

What is cashflow modelling?

Cashflow modelling is a software tool that enables you to forecast your financial future and bring it to life through charts, graphs and other visual tools. Your financial planner can use it to model different scenarios so you can see immediately how they could affect your lifestyle. You can also incorporate your financial planner’s recommendations to see what effect they might have. When combined with the expertise of your planner, cashflow modelling becomes an extremely powerful tool.

Chris Masley Chartered Financial Planner

"I’m a fan of ‘black and white’ when it comes to financial planning, and cashflow modelling helps remove any grey"

Chris Masley, Chartered Financial Planner with Amber River Chancery

Chris Masley, a Chartered Financial Planner with Chancery Financial Planning, part of the Amber River Group, explains: “I’m a fan of ‘black and white’ when it comes to financial planning, and cashflow modelling helps remove any ‘grey’.

“It really brings things to life for the client, and it’s a great tool to use as part of their annual review. They gain reassurance from having a visual representation of how their income and expenses may change over time, which helps them make more informed decisions. Overall, cashflow modelling plays a crucial role in ensuring the financial plans I recommend are realistic, effective, and always aligned with the client’s objectives. Clients really start to look forward to their review meetings as a result.”

The key to accurate cashflow forecasting

Effective cashflow modelling relies on being open and honest with your adviser. You’ll need to share details about your income, expenditure, investments, savings, debt, expected inheritance, or any other sources of income, as well as any changes coming up that you know about.

You also need to be clear about your goals and aspirations, so you can see whether you’re on track or need to make some adjustments to your finances. For instance:

– Would you like to provide a private education for your children (or grandchildren)?
– If you have older kids, would you like to contribute towards their wedding or a property purchase?
– When would you like to retire?
– What sort of income will you need in retirement?
– Are you planning on downsizing?
– Do you have any large expense coming up, like a new car, foreign travel or a holiday home?
– Would you like to leave an inheritance?

Your planner will be able to model these scenarios and calculate the income you’ll need to achieve your goals. If there’s a shortfall, your adviser will make recommendations to bridge the gap and model those too. The beauty of cashflow modelling is that you can plug any of the proposed changes into the model and instantly see how they’re likely to impact your financial plan before you make any decisions.

Conversely, cashflow modelling might also show you that you’re able to retire earlier than you thought.

Modelling your retirement

Sabrina Bailey Independent Financial Adviser and Mortgage Consultant

"It's much easier for clients to understand – they can instantly see the bigger picture, which often prompts a deeper level of discussions"

Sabrina Bailey, Independent Financial Adviser with Amber River East Anglia

Retirement planning is one of the most valuable aspects of financial planning.

Sabrina Bailey is an independent adviser with Amber River East Anglia, and regularly works with clients approaching the transition to retirement. She explains: “Cashflow modelling plays a vital role in helping clients prepare for their retirement years by bringing retirement planning to life with colourful graphs and charts.

“It’s much easier for clients to understand – they can instantly see the bigger picture, which often prompts a much deeper level of discussion about their retirement goals and aspirations.

“Another key benefit is that it allows me to quickly and easily visualise how a range of different scenarios will affect a client’s future financial plan. We can explore various financial decisions on the spot, which means the client doesn’t have to wait weeks for a detailed report. Instead, they receive an instant visual report to take away with them. It’s like having a snapshot of their future life and finances right at their fingertips.”

Sabrina recently helped a couple realise their dreams of a comfortable retirement. She explains: “The husband was approaching 66 years old and was the main earner. His wife wanted him to retire. Unfortunately, she had a health condition and was keen to spend more quality time together while they still could. However, her husband was hesitant because he didn’t think they had enough savings.”

Sabrina used cashflow modelling to tackle his concerns and provide him with the reassurance he needed. She created different scenarios, exploring “what if” situations to demonstrate they would be financially secure no matter what happened.

“The relief they both felt during the review meeting was evident, and it was an emotional moment for them, and for me too!”

Fast forward six months, and during their next review meeting, the couple revealed how their lives had been transformed. The husband had finally retired, and they’d used a portion of their savings to buy a new car and a National Trust membership. They’d already taken trips to the Lake District and Scotland and had plans to explore the rest of the UK.

This success story highlights the power of cashflow modelling in providing peace of mind. By knowing their finances were on track, her clients gained the confidence to achieve their dreams sooner than expected.

“Cashflow modelling lends itself to retirement planning, but it also allows us to model a range of different scenarios"

When will your adviser use cashflow modelling?

Not every adviser uses cashflow modelling – it depends on whether it’s right for the client’s needs, or even whether the clients are interested in this level of detail.

Chris Masley says: “We use cashflow modelling with about 90% of our clients. We find that once they’ve seen it, most people are hooked! They can visualise their financial plan in a way they’ve never been able to before, and they find that very powerful.

“Cashflow modelling lends itself to retirement planning, but it also allows us to model a range of different scenarios to demonstrate the benefits of certain aspects of financial advice. For example, care fee solutions, or how to reduce tax liability such as Inheritance Tax (IHT) or Capital Gains Tax (CGT) from a property sale. It can get very sophisticated.”

Sabrina uses cashflow modelling in client review meetings to keep track of any changes to her clients’ financial situation and ensure they’re still on track to achieve their goals.

She explains: “First, I’ll ask: ‘Has anything changed?’. For instance, they may have downsized to a smaller property and now have more savings to add into their cashflow model. Or they might have helped their child put down a deposit on a house, meaning they have less in their ISA. I can make these changes to their plan on the spot, so they can clearly see how their long-term financial plan has changed.”

Sabrina acknowledges that many of her clients are nervous about the current financial markets following the pandemic and the cost-of-living crisis. “They want to know how their finances would fare if they were ill or needed to reduce their savings because of increases in day-to-day expenses. We can plug in the different scenarios, allowing them to immediately see the impact on their long-term finances and what, if any, changes they need to make.”

Amber River Financial Planning

Cashflow modelling allows you to understand your current financial situation while envisioning and planning your future. No matter what you have mind for your future, an Amber River Independent Financial Adviser (IFA) can help you build and monitor a comprehensive plan for your future, allowing you to navigate the complexities of financial decision-making with confidence.

Get in touch

To speak to us about your investment goals, or to arrange an appointment, call 0800 915 0000, or alternatively use our contact form here.