Putting your lifestyle goals in focus and in context
Preparing a cash flow model for you is a fundamental step in the lifestyle financial planning process. Cash flow modelling measures your current and future financial worth based on your income and expenditure over your entire life. The model also takes account of some of the possible positive and negative financial outcomes that might occur in your lifetime.
The end result, which is based on a number of assumptions, illustrates what your current financial position is, relative to your preferred position and your long term goals. In other words, you can see whether you are on track to attain the lifestyle you want or when you will be. Your cash flow model will also show you what might happen if you have more income than you planned or if your outgoings are higher than expected.
To develop a meaningful cash flow plan you have to be specific. Stating for example that you need ‘enough money to retire in comfort’ is too vague; the cash flow model needs to know exactly how much money that will be. Do you mean fully retired or partially retired? And what is your idea of ‘comfort’? An accurate cash flow model can also indicate if there’s a possibility of you running out of money before you die and demonstrate what you need to do to negate that possibility.
The Cash Flow Model & Investment
Arguably one of the most useful insights cash flow modelling provides relates to investment strategy. If for example your desired lifestyle in retirement is a relatively modest one and a couple of decades away or more, then there’s little point in adopting anything other than a relatively cautious investment strategy. Why take any more investment risk than you need to? Conversely, you may be aiming for a very comfortable way of life in retirement; one which involves hobbies, expensive holidays and travel. In those circumstances, it might be necessary to consider more adventurous investment strategies.