A Wealth Advisory Practice

Financial Planning: Cash Flow versus Goal Based

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financial planning cash flow goal based

Here at Smith Patrick we have migrated our financial planning process to MoneyGuidePro. A major reason is the ability to be more interactive with clients in the planning process. This interactive and iterative process is very beneficial in our opinion. Which brings me to this blog post. One of the first changes to our past method is switching from a cash-flow method to planning using a goal-based method. The reality is that when discussing financial planning based on cash flow analysis or by setting goals, it is more about selecting an appropriate method to achieve a plan. Each method should ultimately arrive at similar conclusions.

The cash flow method is more intensive and requires more initial work from households to put forth all the needed information to design a plan. Plus we are still making estimates given both the quality of inputs (i.e. potential for savings) as well as the more-than-likely change in future circumstances that alter those inputs. Lastly, cash flow analysis requires estimating all material time horizons such as retirement dates, timing of college expense, or purchasing a new business – which are often goals.

A goals-based method is less intensive because it requires less initial data gathering (i.e. no budget work). For instance, savings is initially based on retirement savings without consideration of any after-tax savings. Rather households need to identify retirement goals, in order of needs, wants, and desires. In other words, setting goals isn’t necessarily grounded on what is realistic based on current and future savings.

While each method has its pros and cons, at the end of the day, it is always about cash flows. The issue is how can we most effectively design a plan. Our experience is that there is a wide range of preparedness that each household brings to the table when working on developing a plan. In our opinion the solution therefore depends on the household.

What we like about our current process is that it is designed as a goal-based, which eliminates near-term budget estimations and savings. This is a great starting point. From there it can easily accommodate a more granular or itemized cash flow based plan when required. Adjustments can be made as explicit inputs or can be part of the optimizing process to be able to achieve certain goals. For example a goals-based process might be optimized by increasing after-tax savings, which wasn’t initially considered.

To conclude, all financial plans are ultimately cash flow based and require estimates. The choice of process to get there either with a cash-flow or goals-based financial plan is really about how to approach the inputs for the plan. At the end of the day – both methods when done with care should end up with similar results.