The third article of the Roadmap is about Cashflow Modeling.
To maintain a successful roadmap, it is important to have an idea on the direction of travel, whether that be towards retirement, relocating to another country or simply to ensure assets pass down the generations effectively.
Things can change quickly and that is why planning can never be a linear process and must always be adaptable to the inevitable changes in circumstances and/or regulations. This essentially means understanding how your assets are working for you today so that you can plan for tomorrow.
This is where putting together a cashflow model comes in!
Cashflow Modelling
To put it simply, this is an exercise in pulling together data on all your assets, liabilities, income, and expenditure levels and projecting this over time to work out if your lifestyle is sustainable.
To enhance this model, several assumptions should be considered including (but not limited to) inflation; exchange rates; tax rates; investment growth expectation and market correction impacts.
As always, being an international American gives rise to a unique set of assumptions as any model needs to comply with the differing tax rates charged by Uncle Sam and your country of residence. If this is not modelled correctly, then this will limit its usefulness.
How can I use it?
In summary, it allows you to forecast your future and visually see the financial impact of certain life decisions as well as any changes to regulations.
In addition to this, and as part of ensuring your assets benefit from a coherent “singular” global strategy, using this model can show whether your assets are working as hard as possible for you both now and, in the future. How?
01 Organisation
By simply putting all your assets, liabilities, income, and expenditure levels in one place it allows you to spot opportunities to simplify and enhance affairs.
02 Tax effective income & financing one-off payments
By understanding your overall asset base, you can work out where is the most tax effective place to take an income or one-off payment from your portfolio. For example, if you just had two accounts – a brokerage and retirement account, by taking payment from your brokerage account in the first instance allows you to leave your retirement assets (which are tax free) longer to grow over time.
Depending on the size of payment, understanding the impact on timing (whether that be in 5, 10 or 15 years) will allow for more robust decision making.
03 Spousal benefits
Completing this analysis as a family will allow you to understand the advantages (no matter how marginal in relative size) in splitting assets. Put simply, if your spouse earns less than you, then it makes sense to have assets generating a higher tax bill held in their name, once again allowing assets to work harder.
04 Utilising allowances
The model will show the long-term benefits of utilising any tax allowances available to you. See more about this on the Roadmap part 2 article.
Next step… Estate planning
By modelling your financial affairs in this way, you can start to think about how to pass down assets to the next generation in the most tax effective manner.
The model will allow you to visually understand how gifting assets can impact you and your family and/or future beneficiaries.
Be aware…
A cashflow model is not a crystal ball and should be viewed as an aid to help visualise the future and the impact of certain decisions and regulatory changes. It can provide you with a level of comfort and understanding of your financial affairs but should be revisited at least annually to ensure it remains up to date.
