All Life Ain't Equal

There’s a big problem with cashflow modelling…

Don’t get me wrong, it’s a fantastic tool.

But it’s just that.

A tool.

And like any tool, if used in the wrong situation, it can do more harm than good.

Whilst it can be used to enhance a Life Planning and Coaching Service, it’s not Financial Planning in itself.

It is cashflow planning. Which is different.

You wouldn’t fix a watch with a hammer, would you?

Cashflow modelling is, in essence, maths.

Cold hard maths.

It’s a fantastic piece of kit for calculating how much money we will have in any given year, based on a range of criteria that we input.

It can work out income, expenditure, excesses, and deficits and calculate if and when we will run out of money. Known in cashflow terms as a ‘shortfall’.

If we have a shortfall, there’s normally a Paraplanner with a sweaty brow working out what the client needs to do less of (fun), or more of (work), in order for the shortfall to go away.

But all shortfalls are not equal.

In fact, not all shortfalls need to be fixed.

If your cashflow shows a shortfall in 20 years’ time, the temptation is to reduce expenditure or increase earnings in the short term, to make the long-term shortfall go away.

Simple cut and fill.

But all years are not equal!

To illustrate, I’ll do you a deal….

Take your current decade of age, 20,30,40s etc.

The deal is, you give me one year from your current decade, and in return I’ll give you two extra years when you are 80.

Two for one! That’s a great deal.

Do you want to take it?

No?

What if I gave you three years in your 80’s for one year now?

No?

4?

5?

How many would it need to be?

The answer, probably, is too many.

The reality is the years immediately in front of you are more valuable to you than those in later life.

Why?

Because you’re not guaranteed to get to 80, and a bird in the hand is worth two in the bush.

Even if you do get to 80, you are likely to have less health, mobility, energy and will to do the things that you would want to spend the extra time on.

Some years are just ‘worth more’ than others, so it is not as simple as moving money around the timeline to try and fill in the gaps, otherwise we could be using diamonds to fill potholes that we’ll never drive over.

Cashflow modelling identifies potential issues and shortfalls, but it’s the Financial Planning that helps us decide whether the cost to fix them is worth it.

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