- Wednesday 28 August 2019
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Over this series of articles to date, I’ve looked at the motivations for seeing a financial advisor, what benefits you should expect from the advice and some of the ‘quick wins’ you can expect to see. In the benefits article, I wrote about becoming wealthier, learning more about your finances and having a financial plan. While the first two of these are easy to understand, the benefits of a Financial Plan probably need to be explained in a little more detail.
WHAT DOES A FINANCIAL PLAN LOOK LIKE
First off; what do you think a financial plan looks like? Is it a long written document, a bunch of spreadsheets and tables, or some fancy looking pie-charts and graphs? In reality, it could be all of the above, but don’t let that put you off, as the physical plan you receive is simply a representation of the analysis and recommendations that your advisor has already discussed with you.
WHAT IS A FINANCIAL PLAN
Now, what do you think a Financial Plan is? I would imagine this is a more difficult question to answer, because there is no agreeable definition and any number of possible interpretations.
In my experience, a Financial Plan is a roadmap to a better Financial Future. It is a guide to bring you from your current circumstances to a place you want to be at some time in your life. That’s all it is – nothing more and nothing less.
Over the years, many attempts have been made to best explain how this guide should work and finally there is general agreement that ‘Cash-Flow Modelling’ is it. More usually associated with business planning, it’s been shown that this approach is intuitive enough to understand and powerful enough to empower individuals to make significant positive changes to their lives.
HOW DOES CASH-FLOW MODELLING WORK
At its core, Cash-Flow Modelling looks at your income and your expenditure every year for the rest of your life, with the goal that at no point is spending higher than earnings. It might sound a little strange to project forward decades, but though there may be unexpected changes (more on that later), building your financial life around what we know now and can assume for the future makes sense.
NOTHING TO HIDE
The biggest benefit of Cash-Flow Planning is that it brings into the open every single part of your financial life. This was addressed in the cleaning out your financial closet article, where I explained that you will only get benefit from a financial advisor if you are truly open and honest with them. This means presenting your real (not aspirational) financial transactions, showing what’s coming in and, more importantly, what’s going out. Some of our clients like to fill out a budget page on our website, others have their own spreadsheets for this purpose, while many will simply send us on 6 months of bank statements so we can do our own analysis. Don’t worry, we’re here to help, not to judge (and trust us, like any doctor will tell you, we’ve seen it all!).
SURPLUS OR DEFICIT
Whether or not you have excess cash at the end of the month will determine what options are open to you. If you have, then the most common recommendations are to pay down debt quicker and build up reserves for your short, medium & long term financial needs. If you are spending more than you are earning, then the most important thing is to improve your budgeting habits where possible.
FOCUS ON THE FUTURE
Obviously, your Cash-Flow will change through the years. The great thing about a robust Financial Plan is that we can identify all the factors and scenarios that will impact your money and incorporate them. This includes increased spending for children as they get older (especially in 3rd level), potential increases in wages due to promotion, or the impact of redundancy or early retirement. If we plan for these events and ensure that there is sufficient reserves (in cash or other assets) available, you will find that you never have a shortfall, which is simply another word for a deficit.
YOU VERSUS THE PLAN
As with most things in life, nothing comes for free. Our role as advisors is to show you what’s possible if you make the changes we recommend. Hopefully those changes are relatively painless, or at least not too stressful, but, if they are, then the right approach is to go slowly and make small incremental changes over time.
What Cash-Flow Modelling and a Financial Plan in general does is show you the real impact of these decisions. It’s like holding up two images: One shows you the Future You if you don’t make the necessary changes; the other shows how it looks if you do. Hopefully those images, represented in graph, diagram, spreadsheet or whatever works for you, are incentive enough to take action.
In the next article I’m going to talk about Taking Action. Implementing the advice you get from a Financial Plan is the most important part of the whole process and, in our experience, it can be the most challenging. However if it’s done right, it can be hugely empowering and open your mind to almost limitless possibilities.