What is cashflow modelling?

What is cashflow modelling?

There's a great deal of ignorance and confusion about what a financial planner actually does. Cashflow modelling is a perfect example: it's one of the most valuable tools in modern financial planning, yet most people know little or nothing about it. Understanding it can give you remarkable confidence and genuine peace of mind about your financial future.

In this video, Abraham Okusanya explains what cashflow modelling is and why it matters. The idea is fundamentally simple: matching your expected income throughout your lifetime against your expected expenses. Yet fewer than a third of advisers use any kind of cashflow modelling at all. Okusanya is critical, too, of the traditional straight-line projections many advisers rely on for retirement planning, arguing they simply aren't fit for purpose because their assumptions bear little resemblance to reality.

You'll learn why good cashflow modelling includes worst-case scenarios, and why that matters so much. Knowing that your financial plan can withstand even difficult circumstances, and that you can still fund the lifestyle you want, brings an extraordinary level of confidence. Armed with that certainty, people make better decisions: whether they need to keep working, whether they're taking more investment risk than necessary, and whether they can afford to give money to family during their lifetime rather than waiting until the end of it.

You'll also learn why cashflow modelling isn't a one-off exercise. Your expected income, expenditure and investment returns all change over time, as does inflation. Technology now allows much of this to be automated, with client assets and values updated continuously so the plan can be reassessed again and again. The plan becomes a living, breathing thing rather than a piece of paper filed away and forgotten. As the saying goes, plans are worthless, but the process of ongoing planning is incredibly valuable.

The takeaway: when choosing a financial adviser, be sure to ask them about cashflow modelling. It's a vital component of modern financial planning, and one of the clearest signals that your adviser is helping you plan for the life you actually want to live.

Chapters / Key points

• Why most people misunderstand what financial planners do
• What cashflow modelling actually is
• Why fewer than a third of advisers use it
• The problem with traditional straight-line projections
• Why worst-case scenarios matter
• The confidence and peace of mind good modelling brings
• Better decisions about work, risk and legacy
• Why cashflow modelling must be an ongoing process
• How technology keeps the plan living and updated
• Why you should ask any prospective adviser about it

Transcript

What is cashflow modelling?

Robin Powell: There's a great deal of ignorance and confusion about what a financial planner does. A good example of this is what's called cashflow modelling, which most people know little or nothing about. So what exactly is it?

Abraham Okusanya: The idea of cashflow modelling is very simple, it's about trying to match your expected income throughout your lifetime with your expected expenses. Generally speaking, less than a third of advisers use any kind of cashflow modelling, and I have criticism of the traditional straight-line projections that many advisers use in retirement. They're just not fit for purpose because they are making assumptions that have very little semblance with reality.

Robin Powell: Good cashflow modelling includes worst-case scenarios. It can give you real peace of mind to know that your financial plan can withstand all eventualities.

Abraham Okusanya: The level of confidence that comes out of that, to say, actually, in the worst-case scenarios, I can still support my expenditure, I can still support the kind of lifestyle that I desire. The decisions that an individual can make and the level of confidence that comes with that is incredible, the peace of mind that comes with that. People on the basis of that make decisions about whether they need to continue to work, for instance. They might realise that actually, maybe they're taking more risk than they need to take, for instance. And then, of course, they might be in a position to make decisions about legacy, maybe wanting to give money out during their lifetime rather than waiting until the end of life. So, there is incredible value in that exercise.

Robin Powell: But cashflow modelling isn't something you can do once and forget about. After all, our expected income, expenditure and investment returns change over time, as does inflation.

Abraham Okusanya: The technology is now available to automate all of that, so that you are constantly feeding in the client assets, the values are updated automatically, you can see what's going on with the expenditure as well, and you can continually repeat that process of reassessment of the plan. So the plan becomes a living, breathing thing, as opposed to a sit-and-forget piece of paper. You know, the saying that plans are worthless, but that process of ongoing planning is incredibly valuable.

Robin Powell: So when choosing a financial adviser, be sure to ask them about cashflow modelling. It's a vital component of modern financial planning.