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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About The Author
Dr M Pattabiraman giving a lecture
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 14 years of experience publishing news analysis, research and financial product development. He is a patron and co-founder of “Fee-only India,” an organisation promoting unbiased, commission-free, AUM-independent investment advice.
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Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (Published by CNBC TV18) for DIY investors.
This book helps you ask the right questions and find the right answers. It also includes nine online calculators to create custom solutions.
(2) Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want.
This book helps young earners get the basics right from the start! It will also help you travel to exotic places at a low cost!
(3) Chinchu Gets a Superpower! for kids.
Both the boy and girl versions of "Chinchu Gets a Superpower".
Most investor problems stem from a lack of poor decision-making. We made bad decisions and money mistakes when we started earning, and we spent years undoing them. Why should our children go through the same pain?
What is this book about? As parents, what if we had to groom one ability in our children that matters not only for money management and investing but for every aspect of life? My answer: Sound decision-making. So, in this book, we meet Chinchu, who is about to turn 10. The story follows what he wants for his birthday and how his parents plan it, while also teaching him key ideas about decision-making and money management.
What readers say!
Feedback from a young reader after reading Chinchu Gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from a young age. The importance of money management and decision-making based on their wants and needs. Very nicely written in simple terms. - Arun.
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