Tyler Martyniak is an account executive at Advicent, the financial planning technology provider of choice for nearly 100,000 financial professionals.
A number of articles have been written extolling the virtues of cash flow planning as part of the financial planning process. After years of speaking with advisors, I’ve heard many misconceptions regarding the cash flow planning portion. In hope of clearing this up, here are the five most common cash flow planning myths that I’ve run into.
Myth: Goal-based planning is a better fit for me than cash flow-based planning.
Goal-based planning is, at the core, the practice of starting with a client’s short-term and long-term goals and then creating a strategy to help them get there. This philosophy has exploded in popularity over the past two decades and has become the backbone of modern financial planning. After all, the overarching reason why clients seek financial planning is to achieve some type of goal – whether it be retirement, purchasing a home, a child’s education, or any number of other options.
When it comes to financial planning software, though, some very clever marketing minds manipulated this trend to create an artificial distinction between goal-based and cash flow planning software. They hoped to market goal-based planning software as a new, distinct product from cash flow planning software. But in reality, true financial planning requires the combination of goal-based planning with cash flow analysis. This is the only way to create a truly feasible and comprehensive plan.
Myth: In order to use cash flow planning, I would need to know my clients’ itemized budget. And since most clients don’t even have a written budget, I will hit a wall before even getting started.
Cash flow planning does not require that you account for every dollar a client spends. Unless a client has a history of managing their money poorly, an itemized budget is probably not necessary. It is, however, important for them to have at least a basic grasp on where their money is going.
Go over the following large categories to better understand if their spending behavior needs to change to reach their goals:
- How much is going to bills/mortgage/necessary expenses?
- How much is being saved?
- How much is left over as “fun money”?
A good financial planning tool should give you the flexibility to decide exactly how much cash flow information is necessary for a given plan. If a client needs a more detailed budget analysis, then you should be able to account for that, but you should also be able to keep it simple. I often see advisors define only how much is going into loan payments and savings and they simply assume the rest to be spent. If more detail is needed, you can always add it in later. A financial plan is a strategy which is meant to continue developing throughout a lifetime.
Myth: Predicting detailed cash flow information for just one year is hard enough. Without a crystal ball, there is no way I can accurately predict that level of detail for a long-term plan.
Financial planning is not about predicting the future, but rather being prepared for its unpredictability. This is where cash flow planning becomes important to the process. You cannot account for every eventuality, but cash flow planning allows you to stress test your plan for common concerns such as:
- What if I lose my job, and we go six months without this income?
- What if one of us gets sick?
- What if the cost of living grows faster than my salary?
- What if the market drops?
The what-ifs are innumerable, but the solutions do tend to overlap. What if the clients happen to invest intelligently, protect themselves with insurance, and build an emergency fund? By showing your clients how big of an impact these strategies can have, they will be much quicker and more willing to take action.
Myth: Cash flow planning is great for high-net-worth clients, but my clients are “just regular folks”. Cash flow planning would not really benefit them.
While client needs can vary wildly, there are very few clients who would not benefit from some level of cash flow analysis. Some of the most common and important client questions go beyond simple savings or goal coverage projections. Examples of these are:
- Should we put extra cash toward retirement savings, or paying off the mortgage?
- How much impact would we see from downsizing the house?
- Will our nest egg last longer if we move to a tax-free state in retirement?
- When should I sell my rental properties?
None of these questions can be answered accurately with only a simple calculation. There are many factors in an individual’s financial situation that will shape the best path forward. A robust financial plan creates a sturdy framework on which to build these strategies and robust financial planning software should make it easy to model these with side-by-side comparisons.
Myth: Data entry alone will take me all day. Cash flow planning is way more complicated than I have the time for.
If you are trying to build a cash flow analysis using just spreadsheets, or using an assortment of individual calculators, this is true. However, the right financial planning tool can greatly reduce the amount of time that it takes to build a plan. NaviPlan, for example, leverages strong back-office integrations, client account aggregation, as well as a collaborative online portal to streamline the planning process.
This allows advisors to spend less time on data entry and more on delivering the actual financial advice. On top of that, it is an intelligent tool that can scale to match whatever level of detail you need to include in a plan. As your clients’ needs develop, you can continue to build on what you started.
This process changes the conversation as client interactions are less of a transaction, but more of a relationship. While you work with clients on building a tailored financial plan, you are also building trust with the client. When clients see you as their trusted financial partner, they will stick with you for the long haul.
To learn more about cash flow planning and NaviPlan, click here.