The idea of projecting your finances well into the future is an idea that has become popular in recent years.
The mapping of income and expenditure from where you are today to a distant point, for example into your 90s, may seem a worthless act, as who can possibly know what is going to happen in 10 years, let alone 50?
The assumptions thrown into any model which projects your finances over long periods will, inevitably, be subject to great uncertainties. You don’t know what your income pattern may look like, you may not know if you will need to pay for healthcare, what the cost of living rises will be and so on.
Yet, the exercise remains valid for virtually anyone regardless of their starting point.
The reason lies with an unexpected factor. In a world of uncertainty focusing in on what you can control and properly affect is the key to great financial planning. And one of the main things you can control is your decision making.
Your decisions can vary from poor to great and the difference between those two points could make an unbelievable difference to your future self and future finances.
The mapping of your finances creates a picture. It allows you to see different ‘models’ at work of how your finances look assuming different future scenarios.
A simple example would be to model reductions in expenditure requirements post-retirement against your current targets or goals for expenditure. This may show you can retire earlier, than the alternative model with the higher expenditure. Or you can see what happens if you reduce or increase the investment return expectations on your pensions or ISAs over the next 20 years. This may create a picture to show you how valuable the risk you are taking is, to your long-term goals.
Playing with future assumptions, of all sorts, starts to change the picture and you can see how different pathways affect the results. What this does is throw a light on certain key factors and consequently helps you with your decision making NOW.
And it is that decision making which is in your control.
Mapping out your finances in this way, using sophisticated long-term cash flow modelling software, is not about predictions, nor especially about forecasts (although they are often known as cash-flow forecasts) the exercise is really about modelling future scenarios. When you can view those models you can see more clearly how different movements in the underlying assumptions change the picture. That is the key.
The software is used by most independent financial advisers and is something they can extend to you to use. You and they can run these models from the software and discuss the outcomes and what this means in terms of your finances today and the decisions you need to be taking as a result.