While earning a high income has its benefits, it doesn’t guarantee financial security. Often, high earners are surprised by how quickly their money disappears and are unprepared for large expenses and major life events.
The solution here? Personal cash flow planning. By understanding and managing their cash flow, high earners can move beyond simply making money and create financial stability within their lives. This can lead to better financial well-being and more security in the long run.
What is personal cash flow planning?
Personal cash flow planning is a powerful financial planning strategy that involves analysing your current and future income and assets along with your current and future expenses and liabilities. The aim is to get a detailed picture of your financial landscape in order to understand if you are on track to meet your obligations and achieve your goals.
If you’ve ever run a business, you’ll know that cash flow planning is crucial in the business world as it enables a company to manage unexpected events, maintain solvency, and seize growth opportunities. Well, it’s just as important when it comes to your personal finances – understanding your cash flow can help you navigate financial obstacles more easily, take advantage of opportunities, and set yourself up for the future.
Cash flow planning versus budgeting
Personal cash flow planning should not be confused with budgeting. While both are important components of financial planning, they are quite different. Budgeting involves analysing your income and expenses in an effort to control your spending and ensure that your income covers all your expenses (and leaves some room for saving and investing).
By contrast, personal cash flow planning is a more holistic strategy that considers your income and assets and matches them against your short-term and long-term objectives and goals. Ultimately, personal cash flow planning aims to create efficiency and financial stability while budgeting aims to keep you confined to your income and not overspending.
Why cash flow planning is so powerful
Personal cash flow planning is powerful because it can help you identify whether you’re on track to achieve your financial objectives. Knowing whether you’re on track can be valuable as it enables you to take action early on.
For example, if you’re forecast to have a low level of savings for retirement, you could consider:
- Identifying ways to reduce your spending to help build up your retirement savings
- Deferring retirement so that you have more time to boost your pension
- Increasing the level of investment risk you are taking on within your pension in order to try to generate higher long-term returns
On the other hand, if you’re forecast to have surplus income and capital when you finish working, you could consider:
- Exploring early retirement
- Gifting surplus capital. This can be an excellent estate planning strategy
- Reducing the level of investment risk that you are taking on within your investment accounts and pensions
The benefits of having a cash flow plan
In the long run, cash flow planning can have a lot of benefits including:
- Improved financial well-being – Understanding your inflows and outflows and being clear about your goals can reduce stress around money. Knowing that you’ve got a plan to follow, and that you’re prepared for large expenses, tends to provide peace of mind.
- Effective retirement planning – Through cash flow planning, you can get a clearer idea of how much money you’ll need to fund your ideal retirement lifestyle and whether you can afford to retire early.
- Efficient tax planning – Cash flow planning can be very helpful with tax planning. For example, it can help you manage tax liabilities if you’re a business owner or a partner at a professional services firm. It can also help you determine how much to gift from your estate to minimise Inheritance Tax (IHT).
Ultimately, personal cash flow planning tends to lead to a greater sense of control over your financial future. It empowers you to make more informed decisions today that pave the way for a secure and prosperous tomorrow.
How to achieve financial stability with an effective cash flow plan
When it comes to developing an effective cash flow plan, the first step is to think about your goals and objectives. Do you have any significant life events such as home renovations, school fees, weddings, or retirement coming up? Gaining a clear understanding of these is crucial.
Next, consider your inflows and outflows as well as your assets and liabilities. What are the different sources of income you have? And what’s the value of your investments, pensions, and property?
With all the information you’ve gathered, you can start to make a plan. Here, it can be a good idea to get a professional adviser’s input as they will be able to offer you sophisticated scenario modelling and explain all the different options available to you.
Finally, keep revisiting your plan. Cash flow planning is not a one-off event. It should be an ongoing exercise so that you are always prepared for the future.
How Bowmore can help with personal cash flow planning
At Bowmore, we have decades of experience helping individuals and families manage their finances more effectively. We understand the challenges associated with cash flow management and we can help you tackle them.
To learn more about how we can help you create financial stability through cash flow planning, get in touch.
- Bowmore Financial Planning Ltd is authorised and regulated by the Financial Conduct Authority
- The Financial Conduct Authority does not regulate Estate Planning, cash flow or Inheritance Tax Planning.
- The value of your investments can go down as well as up, so you could get back less than you invested
- Past performance is not a guide to future performance
