Part of our role as your financial planner is to review your current situation and life ambitions so we can design a strategy to get you there. However, it is equally important to prepare for the unexpected.
That is why we often ask important ‘what if?’ questions.
We may use cashflow forecasting software here. By inputting information about your current income, outgoings, and savings, we can build a clear picture of your situation. We can then change certain variables to see the lasting effects on your financial plan.
Here are three reasons why these ‘what if?’ questions are so crucial.
1. They help you plan for large expenses throughout your life
You will likely use the savings you build throughout your life for many different purposes. While you might use some of your wealth to fund your lifestyle in retirement, there may be large one-off expenses to consider, too.
These might include:
- Purchasing a holiday home
- Renovating a property
- Buying a car
- Gifting money to a child for life milestones such as a wedding or house purchase.
You may want to consider how drawing a large lump sum from your savings to pay these kinds of expenses could affect your wider financial situation.
For instance, if you cash in some of your investments, will your portfolio be adequate when you later draw on it to fund retirement? Alternatively, if you rely on cash savings, will you have enough left to act as an emergency fund?
Modelling the lasting effects of drawing from different sources helps you determine the most suitable way to cover large expenses without sacrificing long-term financial stability.
As well as these planned costs, we will consider unexpected expenses, such as paying for later-life care or making emergency repairs to your home.
We can create cashflow forecasts to show how these surprise costs might affect your wider plans for life. Crucially, we can discuss how to boost your savings accordingly, so you can absorb expenses without disrupting important financial aims.
2. Cashflow forecasts account for variations in growth and inflation
When deciding how to build wealth for retirement, you will likely consider how much you want to spend and how many years you might live. This gives you an approximate savings target, which you can use to determine how much to save and invest each month.
However, there are two important variables you must consider: growth and inflation.
The size of your pension pot and investment portfolio depends on the level of growth you achieve on your investments over the years. If you achieve lower-than-expected growth, you might find it difficult to meet all your financial aims.
You also need to consider inflation and how this affects the spending power of your wealth. If inflation is particularly high, your savings may not go as far as you expected, meaning you need to make sacrifices to your lifestyle.
We can model these scenarios and ask whether your investment portfolio would still be large enough for you to achieve everything you wanted in life if growth was subdued. Similarly, we can consider the effects of sustained high inflation on your budget.
Using this information, we can determine how much you should contribute to pensions, savings, and investments each month to build adequate wealth, even if the economic conditions are against you.
However, it is important to bear in mind that cashflow forecasts are only as accurate as the data you input, and the variables we model can always change in the future.
3. You can identify gaps in your protection
During the financial planning process, we also ask important questions about what would happen if you fell ill or even passed away unexpectedly.
Would you be able to cover your living expenses and contribute to savings for the future if you could not work? Alternatively, how would your family cope if you passed away and they no longer had your income?
By answering these questions, we can identify and close gaps in your protection. By investing in life insurance, income protection, and critical illness cover, you can ensure your family is secure if you face health problems or even a bereavement.
Answering our ‘what if?’ questions can give you peace of mind
Ultimately, our ‘what if?’ questions prompt you to consider scenarios that could disrupt your financial plan and make it harder to live the life you want.
By stress-testing your financial plan, you ensure that you and your family are secure and can achieve everything you want to throughout life.
Get in touch
If you want to future-proof your finances, then please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The Financial Conduct Authority does not regulate cashflow planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Note that life insurance and financial protection plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse.
Cover is subject to terms and conditions and may have exclusions. Definitions of illnesses vary from product provider and will be explained within the policy documentation.