By Anthony Dapice, Onboarding Specialist
If you’ve been on the lookout for a financial planning software, you’ve probably noticed that some major platforms (such as eMoney) offer both cash flow and goal-based planning while others (such as MoneyGuidePro) focus solely on goal-based planning. You may have also seen that with RightCapital, advisors can choose from cash flow, goals-based, or a “secret sauce” third option of modified cash-flow. Let’s chat about the basics behind the various planning methods.
What is cash flow planning?
Cash flow planning focuses on inflows and outflows and provides a detailed projection of where money is coming from. With cash flow planning, excess inflows are shown as automatically reinvesting at the client’s current allocation and earning the same rate of return. Cash flow planning is great for clients who are good at tracking expenses as it is easy to show the value of saving every excess dollar of income with properly documented expenses. This method may also be beneficial for clients who are more conservative with their spending and prefer to watch savings grow over time.
What is goals-based planning?
Goals-based planning is less commonly used today than it was used in the past as it does not include pre-retirement income and expenses when considering projections. This method looks primarily to goals (retirement spending and any additional key financial goals), savings, and account information. The projection will focus on the client’s Social Security income, goals, and assets in retirement. Additional pre-retirement income sources (and their tax impact) may not be accounted for.
For these reasons, this method is better suited for clients who are already in retirement. With clients who are not yet retired, this method can feel a little like archery practice, or as this Kitces blog post notes, “it puts the cart before the horse” and may result in hard conversations with the client about needing to create more realistic goals. It’s quite difficult to make thoughtful financial goals before knowing what is possible.
What is modified cash flow planning?
We find the majority of advisors using RightCapital are most comfortable with modified cash flow planning. This method is similar to cash flow planning, but the platform assumes that excess cash flows will be spent. Modified cash flow planning is well suited if you have clients who enjoy using their hard-earned money, perhaps by traveling abroad, collecting cars, or buying season tickets—go New York Rangers!—or who may not be as strict about tracking expenses. While using this method within RightCapital, advisors will find a column labeled “Spend Unsaved Cash Flows” which can be viewed as an opportunity for additional savings that the client may not have expected. If you wish to invest these savings opportunities, we recommend creating a taxable savings card.
If you’d like the opportunity to get creative with which planning method you use for each individual client, RightCapital could be the right financial planning software for you. You can also set a universal planning method across the board if you prefer. Schedule a demo and ask a member of our sales team for more information on how to demonstrate different planning methods.