A cashflow model isn’t a one-off exercise. If you want to use it to inform your financial decisions, regular updates are essential.
A cashflow model is a visual representation of your wealth and how it might change in the future. While the result cannot be guaranteed, it could be a useful tool that helps inform your financial decisions.
Your financial planner will create your cashflow model by inputting data, such as your income, expenses, and the value of your assets. They will then make assumptions to project how your wealth might change. These assumptions could include the rate of inflation or expected investment returns.
You can then use the cashflow model to understand how the decisions you make could affect your future. You may use it to assess:
- Whether you have enough to retire five years early
- How contributing more to your investments now could deliver long-term results
- Whether you can afford to take a lump sum out of your estate to pass on to loved ones now.
However, a cashflow model is only as useful as the information that it contains. Using an out-of-date model could lead you to make decisions based on inaccurate data.
3 times you might benefit from updating your cashflow model
1. When your lifestyle goals change
Often when you’re creating a financial plan, you set out what you’d like your life to look like decades in the future. Naturally, some of these goals will change over time.
Perhaps you’d thought you’d like to work until you’re 65, but you’re now 55 and want to find a way to strike a better work-life balance. Similarly, an opportunity to travel more might mean you’d like to increase your monthly budget now to make the most of it.
As your lifestyle goals change, updating your cashflow model could help ensure that it continues to reflect the life you want to enjoy now and have in the future.
2. Following major life events
From getting married to selling a business, major life events could affect your goals and financial circumstances. Following these events with a financial review could help you take stock of whether you’re on track.
Imagine you’ve received an inheritance. A goal you thought was a decade away might become possible now – would you bring forward your planned timeline? Using your cashflow model could help you weigh up different scenarios, so you can assess what’s right for you.
3. To reflect factors outside your control
Factors outside your control might affect your finances. For example, a period of high inflation may mean you need to adjust your outgoings now and over the long term, or investment volatility could mean you’re no longer on track.
While there might be little you can do about these factors, understanding their potential impact could help you respond to them in a way that aligns with your wider financial strategy.
A regularly reviewed cashflow model could mean you’re better informed
An up-to-date cashflow model could highlight both risks and opportunities. You might find your investments are on track, so you could scale back monthly contributions to use the money in other ways. Alternatively, you could find a gap in your finances, and being aware of it sooner could provide a chance to bridge it.
As a cashflow model will typically show how your wealth might change over decades, even a seemingly small adjustment could have larger implications.
Imagine you’ve had a pay rise, and you decide to divert £100 of that additional income to your pension each month. As pension contributions are typically invested, there’s an opportunity for this money to grow over the long term. A cashflow model could highlight how this change might allow you to retire sooner or take a larger income once you give up work.
So, how often should you review your cashflow model?
Reviewing your cashflow model is likely to form part of your regular meetings with your financial planner. In addition, you might want to schedule meetings if you’re faced with a major decision or life event as mentioned above.
Talk to us about your cashflow model
Whether you’d like to create a cashflow model or would like to update your existing one to reflect changes in your life, we could help. Please contact us to arrange a meeting.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
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.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The Financial Conduct Authority does not regulate cashflow modelling.