This article explains how a simple cash flow projection can significantly impact our goal-based financial planning. When I started creating Excel sheets in 2010-11, I slowly realised that all goal-planning must culminate into a cash flow projection.
The freefincal robo advisor tool automatically creates a cash flow projection with goal-planning results. If the user chooses to use the same portfolio for all goals (the unified portfolio approach), the investment amount necessary is computed directly from the cash flow projection after accounting for systematic withdrawals for the goal (to reduce the sequence of returns risk).
This screenshot explains what I refer to as a cash flow projection. Consider a 30-year-old with a post-tax monthly salary (including total EPF deduction) of Rs. 1.2 lakhs. The family’s monthly expenses are about Rs. 60,000.
The total monthly investment for retirement (including total EPF deduction) is around Rs. 35,000). He is investing Rs. 10,000 monthly for his daughter’s college fees.
To create a cash flow projection, all you need to do is enter this information along with your age in a spreadsheet and inflation each of them accordingly. For example, we suggest using at least 7% inflation for monthly expenses before and 6% after retirement.
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The salary increase is industry-dependent. We recommend aiming for at least a 10% increase in investment each year, although this can get pretty tough after a few years if the salary does not keep pace.
Those close to retirement can replace their salary with an income from the corpus. As you create this projection, you will start realising how much you need to invest in future and the pace at which your salary should grow. You can deduct your expenses and investments from the salary to check for sufficient salary growth. Also, don’t forget any EMIs if you have any (or will have some in future).
In adjacent columns, you can also add entries for the annual averages of the actual salary, investment for each goal, expense, etc. This would give you an idea of how you are progressing. Two simple variants of a cash flow chart are available here: Monthly Financial Tracker.
The more you stare at this sheet and the more details you add, the better your perspective of where you stand and what is necessary. If you find this hard to DIY, you can use automated tools such as the freefincal robo advisor for a comprehensive cash flow chart.
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Dr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), Linkedin, or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
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