128- Why A Cash Flow Model Is Critical For Your Financial Plan

Without a cash flow model you are simply planning blind. How do you know if you have 'enough' if you don't start with the end in mind and work backwards? 

In this episode Benjamin describes what a cash flow model is, and explains why a cash flow model is so important within your financial planning. 

You can run one of these yourself within your plan in a few, simple steps. This episode will help to lay the foundations. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

Getting on top of your personal finances doesn't need to be complicated or scary. Arm yourself with the only knowledge you need to transform yourself from money novice to money nerd! 

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Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:11

Hello Money Nerds, it's Friday again. Personal finance Friday has rolled around ever so quickly. I know you've been waiting tentatively since last week's episode, but here we are once again. Welcome to Heads Up on Money. It's me, Benjamin Mitchell, your host, and thank you as always, Money Nerds, for joining me. So in last week's episode, I give a little bit of a rundown on binning your 2026 financial resolutions, and instead not focusing on the greater things that you inevitably will not keep up with because financial planning is sinfully dull, but instead just focusing on those quick wins, those easy, low-hanging fruit wins that you can adapt with your financial planning that often has the maximum reward for the minimum effort, and you don't even need to leave the comfort of your armchair. What can say better than that, money nerds? If I haven't already sold it to you, please listen back to last week's episode. But in this week's episode, I'm talking a bit more around the practicalities of good financial planning and how exactly you can unlock some of the retirement anxiety you may have with your financial planning, particularly around the prospect of how do you know you have enough? It's all very well having this pot of money there and it looks like a good amount on paper. You've invested in the right asset classes, you've paid yourself every month before you've started spending, you've done all the right things, but how do you know you've got enough? What tools can you utilize to answer that eternal question? Because at the end of the day, and why I really enjoy my job is I like to say I'm not working with money, I'm not working with finances, but instead I'm working with people. Because this really, money nerds, is the most important part of your financial planning toolkit. Without having a cash flow model, you really do not have a financial plan. And I could climb up in my soapbox about this, but there are so many financial advisors out there that are still just selling products to people. They're sitting down, they're reviewing a pension each year, they're telling them where to invest their money, how much they can pay into a pension, which is all great if they're delivering the right advice, don't get me wrong, lots of good advisors out there doing that, but you need a plan at the base of it. You need to know exactly what are you working towards here? What is the end goal? Because I said to you before, Money Nerds, start with the end in mind. How do you know if you've already got enough and you do not need to still be working if that's causing you misery? Or how do you know the actions you're taking today and what that looks like in the future? How do you get that kind of visual reward for the compensation of loss of enjoyment today, if I'm articulating that well? For instance, let's say you've got£2,000 disposable monthly income and a financial planner comes along to you, or your family friend says, look, park grand of that a month in a pension and£500 of that in an ISA, and you're stripping away a lot of your present-day enjoyment for that. Do you not want to see what does that look like in five, ten years' time for future you? Surely if you've got that tangibility, that concreteness to your financial plan, it will empower you to become more confident and believe in your financial plan more today. Whereas if you're just shooting blind, throwing in a grand a month to your investments, well, how do you know if that's enough or more damaging? How do you know if that's too much? What if you are not enjoying life enough today because you're too scared about not having enough tomorrow? I this really, really annoys me. So I'm going to outline exactly what a cash flow model is in this week's episode. So it sounds a bit technical, it's really not money nerds, and it's something you too should be doing as part of your financial plan. Because arguably it is the most important part of your financial plan. So let's get into it. So I'm framing this week's episode around the benefits of a cash flow model for soon-to-be retirees. Now, I've talked about at length in the podcast before retirement is not the kind of stereotypical notional idea that it once was. But indulge me with this for the purposes of this episode. Of course, you may have your own financial plan, what you're working towards, but the principles still apply and the benefit of a cash flow model still apply. Now, when it comes to retirement, there was some research done this or last year, I should say, more accurately. Uh still not getting into the 2026 mindset quite yet. How are you getting on? Do you remember to change the date every time you write it? Because I'm still struggling on paperwork. Anyway, in 2025, there was some analysis, I think it was done by one of the larger players in the UK market. I think it was Aegon, don't quote me on that. But looking at the figures here, they said that UK adults they associate quite a lot of negative emotions with retirement. Primarily anxiety, 26%, fear, 18%, guilt, 15%, excitement, 15%, sadly, security only 17%, relief 10%. This is pretty bleak findings. And I think the reason is because as Brits, it's hard to flick the switch from accumulating suddenly into spending. And of course, there are other subtleties around that, around the more personal, human nature of retirement, loss of purpose, loss of social circles, all of that stuff. We're not going to get into the weeds on that today, but from a financial lens, it's clear that even those who may have inverted commas enough sometimes do not believe they have enough or do not have the confidence to know they have enough. Now, of course, this is why I think having annual reviews with your financial planner is super important because you can adapt to plan every year and provide that ongoing support to say you are on plan, you are on track, you should feel okay with this. Of course, and I always encourage clients, you can do this yourself. I encourage as many people as possible to take ownership of their financial futures. So if you're doing this yourself, sit down once a year and review your financial plan to make sure you're still on track. The sad reality of where we're at in the UK is that financial advice is still an expensive commodity for a lot of people, and there is an advice gap where more people need advice than financial advisors can effectively come in and give advice to. So we have to take ownership of our own financial futures, and this is why Heads Up on Money and many other great personal finance podcasts out there exist. So if you are running your own financial plan, do try and review this fairly regularly. Set a date in the diary once a year to review your financial plan and ensure that these negative emotions and worries you have are allayed as much as possible. Now, where this fits into this week's episode is around the premise of a cash flow model. So what exactly do I mean by that? So, first of all, what exactly is a cash flow model? So the premise effectively is what it's telling you is ultimately how your wealth might change over the course of your lifetime based upon the known facts you have, your concrete info, the financial plumbing, as I call it with clients, the boring stuff. It's things like your asset position, your liabilities, what income you've got coming in, and your planned expenditures. Now, the cash flow model can be altered to reflect lots of different scenarios, certain growth rates, certain inflation rates, certain events that may be out with your control. So, for instance, you could model the impact of unknown market crashes. For instance, you could uh try and amend the plan to look at how would your retirement look if you were retire at 60 versus 63 versus 65? What if you also wanted to help one of your children onto the property ladder and that mandated a 50 grand withdrawal from one of your ISAs when you're 60 to fund that? The list goes on and on here, folks, and obviously this is the beauty of good financial planning is it's down to your own personal financial life. Everybody's financial life will be different. The premises and the products that we hold within those financial plans do not need to be different, do not need to be particularly clever, but your financial plan will be as unique as you are. So the premise here to focus on is what a cash flow model is, is almost like a visual representation of all of this information. Now, cash flow models will be wrong as soon as you run them because life happens and we are controlling uncontrollable information here. Markets are returning different returns all the time, we do not know what the future holds, which again, reiterating a previous point I made, is why annual planning reviews to check in on the progress is so important, whether that is with your financial professional or whether it's with yourself if you're doing this yourself, but make sure the plan is reviewed because a cash flow plan, a cash flow model is outdated as soon as you run them. But nevertheless, a good cash flow model should give you a bit of confidence, and where it comes into great effect is for instance planning for retirement because you can model different standards of retirement, different levels of expenditure you might wish to fulfill in retirement, and a cash flow model will look at the incomings and the outgoings in your financial plan to see are you on track? Do you have enough? What is your number? What is the amount of wealth you need to live out all of your goals and ambitions for retirement? It then flips the lens on do you have too much wealth? Are you going to pass away with more wealth than you could conceivably need? Which offers the luxurious decisions and the things I love talking to clients about. Is perhaps do you wish to revisit your objectives? Do you want a higher standard of retirement? Do you perhaps want to push retirement earlier than you envisaged it would be? Perhaps you're not enjoying work anymore, you've got a desire to visit family, grandchildren have come along. Perhaps now is the time to flick that switch and you can afford to do that sooner than you had done otherwise. Well, this is what a cash flow model will help bring to life. It gives you that confidence as much as anything can in financial planning, save for having a crystal ball. And sadly, none of us are gonna have that, despite that would make my job much, much easier. But without a crystal ball, this cash flow model is the best tool we can have because it could give you an indication of what might be a sustainable income throughout your retirement, and it's understandable why people feel anxiety and fear about spending their retirement savings. It's really hard when over the course of your working life you've been educated and told to save, save, save and invest, invest, invest, and then all of a sudden that suddenly just switched off. And now the mindset has changed to spend, spend, spend. Great and easy to say, but really hard to do in practice because people worry they're going to run out of their wealth. And obviously, when the pensions rules were changed a number of years back, when George Osborne, I think, was the Chancellor, pension flexibilities, pension freedoms means we've got control over how much we take from our pensions and when we want to do it. And if you want to blow the lot on day one of retirement, obviously would not be practical from a sustainability perspective, nor would it be tax efficient, but you could do. And of course, what's happened is as defensive Brits, we worry, worry, worry, and turns out most of us are outliving our wealth rather than our wealth outliving us. And a cash flow model can give you that confidence, that visual serotonin hit to say yes, you're on track. Yes, you can spend 30 grand a year in retirement, or perhaps you can spend 35, and this is what that might look like in the future. If you were to also gift to young Jimmy or whatever your son is called, that's what this would mean for your retirement standard of living. So the beauty of these models is you can tease out different scenarios, different what-ifs to see exactly how is the picture looking. And the greatest confidence it can give you is that if you run all of these scenarios and say, even if you were to give a gift to little Jimmy, even if there was to be a market crash that was a depressed market for two or three years, longer than typical bear markets, even if all of that happened, you can still afford to live out your retirement as early as you wish. Isn't that worth its weight in gold? And of course it is, because the cash flow model can project how your wealth might change. You could see things such as can you maintain your current lifestyle with the pension savings you have? Could perhaps tell you, can you afford to retire earlier than the state pension age? So many people make that retirement mistake. They think that is when the state pension comes in, so that is when I have to retire. Well, no, you don't. You can access your private wealth pensions before the state pension age, typically 10 years earlier, it does vary. And of course, ISAS can be accessed at any point. So you can phase in your retirement when you can financially do so, and a financial plan, a cash flow model can help to illustrate this. What about if you said, you know what, screw this, I'm going to target a higher level standard of retirement during the first 10 years of retirement, perhaps, when I am more physically fit and inclined to do some travelling? So let's push this up by 15 grand a year for the first 10 years. Does that still look sustainable? Does that still look sustainable if there's going to be a market crash when I retire? Does that still look sustainable if I give little Jimmy part of his inheritance now so he can get onto the property ladder? There are so many different iterations you can run, and a cash flow model brings this all together. And of course you can change the assumptions you use within your cash flow model. So perhaps you could amend the investment profile within your assets, perhaps switching from equities to lower growth, lower volatility investments. What does that mean for your financial plan? What about if inflation is higher than the current expectations? As I've alluded to, you can model market crashes, what happens if your portfolios take a dip? Does that mean everything still remains sustainable? So bringing this all together, a good cash flow model just might give you that bit of confidence to allay some of these retirement concerns you might be having. Now, how you do this exactly will vary depending upon if you're working with a financial professional, they should have some fairly sophisticated cash flow modeling tools that they can use with you to bring all this to life, often resulting in some very pretty graphs that give a bit of engagement to an otherwise fairly dry subject. But there's nothing stopping you doing this stuff yourself. It can be as basic as having an Excel sheet with all of your incomings, your outgoings, your investments, you can apply certain growth rates, it doesn't have to necessarily be complicated, it doesn't have to be very pretty, doesn't have to be perfect, but you can do this yourself with a little bit of time. And it's super important to do so. I I can't reiterate that enough. Is planning blind and just hoping for the best rarely leads to good outcomes. Start with the end in mind. What are the objectives you have? What do you want retirement in this case to look like? What does that mean financially? What level of standard of retirement do you envisage? Do you want to spend 50 grand a year after tax, 40 grand a year, 60 grand a year after tax? It will come down to you, your own standard of living, and it then feed in what income have you got that could meet that gap? And then subtracting those two means you need a pot of private wealth, investment wealth, to sustain that gap over the course of the rest of your lifetime. And do you currently have enough? If you don't, do you need to amend the investment profile you've got within your assets, take on higher growth potential within your funds? Or perhaps you've got too much, which means can you have some flexibility, changing the time frames upon which you want to retire, or keeping the retirement at the date you envisage, but changing the retirement trajectory. So spending more money perhaps throughout retirement, or more money in the earlier years of retirement, or perhaps in the comfortable position of gifting some of your wealth, giving some of your money to those who will enjoy it now, giving with a warm hand rather than a cold heart, as the saying goes. All of this can come to life with a cash flow model. So sit down today. I really encourage you to do so, folks. Whether you're doing this with your financial planner, if you're currently paying for a financial planner and they're not doing this, then I ask, what the hell are they doing for you? But if you're doing this yourself and you've got an Excel sheet, or you're using some kind of other illustrative software that you have access to, again, doesn't need to be pretty, doesn't need to be complex often. It just needs to give you that visual confirmation, that visual confidence to say, you know what? I'm on track here. I have the confidence to embark on a rich and rewarding retirement and to not feel anxiety, to not have fear, to not feel guilty and to ultimately spend down the wealth that you've worked very hard to accumulate. I know it's easier said than done. I know, particularly as pessimistic, overly negative Brits, it's even harder. But having a cash flow model really does give you the impetus on the start to give you the confidence to embark on that plan. And then once you have that cash plan, cash flow model in place, review it every year. Update it based on what your current circumstances are, have your retirement plans changed, have the pots that you're invested in changed value, hopefully they've gone up if you're investing in the right asset classes and you're offsetting the terminator of wealth that is inflation. Update everything because life happens, things will change, objectives will change, and some of the tangible information will change. But start with the end in mind, and to do that, get a cash flow model in place. There, have I encouraged you to do that, hopefully, and hopefully I've done it in under 20 minutes looking at the clock. Yep, I think we're on track. Let's wrap this one up. There we go, money nerds, that's the end of another episode of Heads Up on Money. The merits of developing a cash flow model should not be underestimated. I hope you've enjoyed this week's episode. If you've got any questions about anything I've raised in today's episode, please do reach out to me. There's some of my links in the show notes. If you've not done so already, I would encourage you to complete the retirement assessment questionnaire. Five minutes to complete gives you bespoke retirement advice results relevant to your own situation. Obviously, I can't give you one-to-one bespoke financial advice, but I can give you some pointers about some of the things you should be focusing on and where your blind spots currently are in your financial plan. So there's a link to that in the show notes. If you haven't completed already, it's fairly simple to do so. As I said, only takes five minutes. So I thank you, Money Nerds, for listening. As always, I've been Benjamin Mitchell. I will see you next week for episode three of Heads Up on Money 2026. Hope you've had a good one so far and 2026 is treating you well. I'll catch you next Friday. Stay safe out there and have a wonderful, wonderful weekend when it comes. See you soon. Bye for now.