Cashflow Forecasting – planning income and expenditure

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Introduction

Historically, cashflow forecasting was a method used by business owners, managers and accountants to analyse income and expenditure over a set period of time. By analysing inflows and outflows of cash for each period, e.g. each month, they were able to see what strains they would have on cash at any one time – e.g. was there any particular month or months where they needed to draw on other sources of cash.

Similarly, the use of a spreadsheet allowed the business manager to perform a number of “what if” scenarios – “what if” price increased 10%, “what if” this loan was repaid early.

Cashflow Forecasts and Personal Financial Planning

These same principles can be applied to your own personal finances. We all tend to have the same regular inflows and outflows of cash – e.g. if you’re in a salaried position then your net take home pay will tend to be the same each and every month. It is the irregular payments that can cause problems, for example car insurance premiums paid on an annual basis, payment for holidays etc.

By entering your expected income and expenditure each month into a spreadsheet it is possible to see the monthly flows of cash that you expect to occur.

The spreadsheet which accompanies this article contains most areas the typical family might find in terms of income and expenditure.

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Download the cashflow forecast spreadsheet –

Excel 2003 version – cashflow_forecast.xls

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Prepaid Credit Cards

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Introduction

Prepaid credit cards are far from a new idea – the principle has been around for many years with such items as prepaid electric meter cards etc all working on the same principle.

In essence what a prepaid credit card offers is the facility to make purchases and payments through the Visa or Mastercard system, in the same way as someone using a “normal” credit card would – this is the same for purchases both in stores, shops, restaurants etc. as well as with online shopping on the internet.

They have a number of benefits over and above a “normal” credit card and these features and benefits will be considered below: –

Available to Almost Anyone

One of the downsides of a normal credit card is the need for the applicant to pass a credit check with a Credit Reference Agency – if you’ve got or have had a history of arrears, CCJ’s or Bankruptcy then obtaining credit can be very difficult if not impossible. Applying for a prepaid credit card normally does not require a “credit check” as the applicant is not actually applying for credit.

Top up direct or through outlets

Money can be added to your card either through a standing order from your bank account on a monthly basis, or through cash deposits at any number of retail outlets, including Post Offices. Check where it is possible to top-up your card before completing an application.

Help with Budgeting

By depositing a fixed monthly sum onto your card you are effectively limiting the amount of money available to spend through that card – remember, you are not borrowing any money from the card issuer. Say for example you are trying to reduce expenditure in one particular area – set a monthly budget for that area of expense and set this as your regular top-up – once the money has gone you will have reached your target for that month.

Different Types Available

It is possible to choose from several different types of card – you may have a personal preference between Mastercard, Visa or Maestro. These days the differences between Mastercard and Visa are fairly small – Mastercard tends to be more widely accepted in America with Visa more popular in Europe – both cards are normally accepted at most outlets.

Increased Security

Carrying a pre-paid credit card is a good idea in our opinion, preferable to carrying lots of cash. In the event of loss or theft simply report this to the card issuer as soon as possible and they should be able to cancel/block the card to limit the amount of money which you could lose through someone else using the prepaid card.

Ideal for Travelling

One idea which might be of interest to you is the use of a prepaid card whilst travelling or on holiday, either in the UK or abroad. No matter where you go in the world the card could be topped up by a friend or relative based here in the UK. A cheap alternative to other forms of transferring funds abroad – simply ask your prepaid card provider to issue a second card on your account and pass it to a friend or relative who can then use that card to top up cash here in the UK.

The great thing about this idea is that if you deposit money to the card here in the UK through certain outlets then the funds are credited to your card almost instantly! Check with each provider before applying for a prepaid card that they offer this second card facility and that they allow instant top ups through selected retail outlets.

Ideal for Shopping Online

A prepaid card can normally pay for itself in no time – especially if you are keen on online shopping – it’s common to be able to make great savings online through shopping around different retailers. Often though people are concerned about security with online shopping – particularly with “phishing” and other scams being carried out. With a pre-paid credit card though the amount of money at risk is limited to the amount of cash that has been credited to the card.

Ideal for Business Use

Many companies need to issue their staff and employees with credit cards. With a prepaid card it is simple to limit the amount of funds available for use by each employee – a different amount could be credited to each credit user on a monthly basis making budgeting more straightforward for the company.

Debt-snowball – repay your debts quicker

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Debt-Snowball – Repaying your Debts Quicker

It is common for people to have more than one debt – for example you may have a mortgage, a personal loan, a few credit cards, hire-purchase etc. Nobody likes debt, unless it is being used as leverage for an investment, and for the majority of people the quicker it is paid off the better!

Snowball those Debts

Consider a hypothetical situation whereby you have say 3 debts as shown in the following diagram –

debt-example

In this example the borrower owes a total of £105,600 and is paying £759 per month for this benefit. There have been other methods mentioned on the internet whereby you effectively repay the smaller debts first. I can understand the psychology of this approach – it is easier to cope with one large debt than several smaller debts. In the example above, any surplus funds would be used to pay off Credit Card 2 first – this debt could be cleared fairly quickly based on the amount remaining outstanding and in terms of “cost” it carries an interest rate of 16% making it the second most expensive debt.

The Logical Approach to Debt Repayment

Regardless of the amount of debt outstanding let’s focus on the Interest Rate.

The interest rate tells us the “cost” of owing that amount of money. For example, with Credit Card 1 the interest rate is 19% – therefore for every £100 that we owe to that lender they will charge us £19 for those 12 months – it’s as simple as that.

To demonstrate the logic of this, consider a situation where you owe £100 to each of Credit Card 1 and Credit Card 2 in the above example – Credit Card 1 is “charging” you £19 per year for this privilege and Credit Card 2 is charging you £16 per year. If you had £100 available to repay one of those two credit cards which one would you choose? Logic dictates you repay the more expensive one first.

Conclusion

Therefore, the logical conclusion is to check all your debts and see how much they are costing you each year – check carefully as interest rates have a nasty habit of increasing beyond what you THOUGHT you were paying over time. Once you have drawn up a “league table” maximise all efforts to repay your most expensive debt first, making just minimum payments on the remaining debts – as soon as the first (most expensive) debt is paid off move on to the next one.

Action

Make a list of all debts and interest rates – make a concerted effort to repay the most expensive ones first. Maybe consider transferring any outstanding balances from higher charging credit cards to those with a nil or lower introductory balance allowing you to make greater savings and, thereby, repay your debts quicker.

Critical Illness Cover v Income Protection

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In this article we will compare income protection insurance to critical illness cover and consider how they can be used together to protect your financial position.

Critical Illness Cover or Income Protection?

Many people ask whether it is more appropriate when considering insuring against ill health to take out income protection insurance or critical illness cover.

We think the confusion arises as many people seem to believe that the two types of insurance do the same job and fulfill the same need. Before considering this in more detail lets just recap on what each type of insurance is and how it works.

Income Protection Insurance

Income Protection Insurance, previously known as Permanent Health Insurance (PHI), is designed to provide the person covered with a replacement income in the event that they are unable to work through accident or ill health. It is not to be confused with ASU (Accident, Sickness and Unemployment) which generally pays out a benefit for a maximum term of 12 months.

After a deferred period (period between telling the life company about the illness and the cover commencing payout) the regular tax-free income is paid to the life assured until the earlier of return to work, death or retirement.

The income can be level or indexed, i.e. it increases each year, either in line with RPI or a fixed percentage, to maintain the real value of the policy.

Critical Illness Cover

Critical Illness Cover (CIC) pays out the sum assured when the life assured is diagnosed as suffering from one of a range of critical illnesses.

Cover is normally provided for a “core” range of illnesses as set out by the Association of British Insurers Statement of Best Practice – covering such illnesses as cancer, stroke, heart attack, kidney failure, major organ transplant, multiple sclerosis and coronary artery bypass surgery.

In addition to this, the majority of policies also cover “additional” conditions such as blindness, coma, loss of limbs, loss of speech, Parkinson’s disease, benign brain tumour, paralysis, terminal illness, third degree burns to name but a few.

The policy can be taken out for a fixed term or whole of life on a single or joint life basis

Income Protection and Critical Illness Cover – complementary policies

To put this into context we need to consider the following basic points of each type of cover: –

1. Income protection = regular income if unable to work through accident or sickness
2. Critical Illness Cover = lump sum payment on diagnosis of one of a number of critical illness conditions.

It is therefore possible to see that depending on the nature and severity of the illness it might be possible for the policyholder to claim one or both policies.

Off work sick – but not critically ill

An illness may be severe enough to prevent you from working (thereby making a claim under the income protection plan) but not one of the listed conditions for claim under the critical illness plan.

Critically Ill but able to return to work after treatment

An illness may be critical e.g. cancer, but not such that in the event of successful treatment of the condition it is feasible that the life assured could return to work after a period of time maybe a year or so – but not long enough to really benefit from making a claim under an income protection plan.

The income protection plan may also provide proportionate benefit in that if the life assured returns to work on a lower salary as a direct result of having suffered their illness they may be entitled to continue receiving some of the benefits payable under the income protection plan

Summary

In conclusion, we would consider critical illness cover and income protection insurance to be complimentary in their nature and therefore it would be wise to consider taking out both types of insurance.

Naturally you should consult an Independent Financial Adviser before purchasing either of these types of insurance as they will be able to research the marketplace for you and make suitable recommendations based on your own particular circumstances.

We would welcome any comments you wish to make below.

Income Protection Insurance (PHI) – an introduction

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Many people have heard of income protection – yet many remain unsure exactly what it is and how it can be used to protect their family and themselves.

What is Income Protection?

As the name suggests, Income Protection Insurance, previously known as Permanent Health Insurance (PHI), is a type of insurance which is designed to replace lost income in the event of long term illness or accident.

Unlike Mortgage Protection Insurance and ASU cover, which usually pay an income limited to 12 months, Income Protection Insurance is designed to pay replacement income right up until retirement in the event of the claimant being unable to return to work.

How much Cover can I get?

Life companies will normally cover you for between 50% and 60% of your pre-disability income. In the event of a claim they will normally deduct any continuing income or state single person long term disability benefit.

A claim once in payment under an Income Protection plan is normally paid free of UK income tax.

Under what Circumstances will a Claim be paid?

This is dependent on the basis on which the plan was originally set up: –

Own occupation – pays out if unable to perform your own occupation as disclosed on the application form

Any occupation – pays out if you’re unable to work at any occupation, normally based on work in line with your education and training

Activities of Daily Living – this type of plan pays out if you are unable to perform a number of task – such as eating, dressing, using the toilet etc – you need to be unable to perform a number of tasks from a range of tasks stated by the insurance company – e.g. any 2 from a range of 6 tasks.

Own Occupation cover generally carries the highest premium rates – and may not be available for riskier occupations e.g. working at heights, with explosives, dangerous occupations etc.

How Soon Can I Claim?

You normally submit your claim as soon as you stop working. The payout on the plan will not start until the end of the “deferred period” – you choose this at application – e.g. one month, three months, six months, twelve months.

Warning – the deferred period can in some instances commence from the date of notification to the life office, NOT the first day of sickness – make sure you don’t wait too long to tell them of a claim.

Naturally the longer the deferred period, the lower the premium, since you are less likely to make a claim on the policy.

What About Inflation?

You can set up your plan to allow for annual rises in the cost of living and most people opt for this benefit – your level of cover generally rises each year with a corresponding rise in the monthly premium to offset the general increase in the cost of living over time.

What About if I am Well Enough to Return to Work?

Normally your claim stops but you carry on paying premiums and your policy continues – the insurance doesn’t end.

There are various options under these plans which may be available: –

Proportionate benefit – if you returned to work in a lower-paid position as a result of your illness then a proportion of the benefit may continue to be paid

Rehabilitation benefit – if you returned to work after a period of illness and your income falls, then this benefit may pay a proportion of your cover to cover the loss of income and this benefit normally pays for up to 12 months.

Linked Claims – if you return to work following illness, and subsequently have to stop working due to the same condition then this benefit means you don’t have to go through the same deferred period again and the claim payout can recommence without delay.

Choosing a Policy

We believe that income protection insurance is vitally important for all individuals – especially those who do not have any cover through their employment and, in particular, the self-employed.

Most people are dependent on their incomes – simply ask yourself this question – “how long can we survive with no income?”

Naturally every policy is different so it is therefore important to take advice from an Independent Financial Adviser.

In our next article we will consider this type of cover in more detail and the practical uses to which is can be put

Please share with us your experiences and thoughts on income protection insurance below.

Needs and Wants – the Basics of Budgeting

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As with all topics, it’s best to start at the beginning with the simple steps first.

Sorting out Your Finances

In order to make decisions about what steps to take with the various aspects of your personal financial planning it is important to take a “snapshot” of where you are at at this moment in time.

A plan is just that – a plan – you decide on where it is you want to “arrive”, consider your current “position” , weigh up the various methods of getting there and choose the path which seems most appropriate to your current family situation, income profile, future employment prospects.

Where am I now?

There are three basic areas which you need to give serious consideration to which will help you formulate in your mind the starting point for your journey through your personal finances!

1. What do I OWN?
2. What do I OWE?
3. Who owes ME?

This will create a snapshot of your current “ME” position. In terms of what do I OWN – do you own your own house (what is its value?), what savings do I have? What investments do I currently have?

Basically, you need to consider all assets, either tangible or intangible.

Is a car an asset or liability? In one respect it is an asset as it allows you to travel to and from work, allows you to earn a living, saves you TIME not having to walk.

But in another respect it is a liability – you need to buy it, service the car loan, put fuel in it, maintain it, insure and tax it, then after several years and £1,000’s of depreciation you have to swap it in for a newer car.

After you have made a list of all your assets you need then to consider all your liabilities – just how much do you owe, how much is it costing to owe that money (interest rate) and is the amount you owe rising or falling over time?

Finally also consider all amounts owed to you – who owes you money? What is the prospect of it being repaid?! This money owed to you is an asset.

Finally consider all the “intangible” assets you own – these are not physical items like cars, jewellery, shares in companies etc. These are the skills, qualifications, knowledge, contacts and relationships – for many people when they are starting out in life these “intangibles” are considerably more valuable than the “tangibles”. In an ideal world, over time in order to build your wealth you need to follow this formula: –

“intangibles” + time = “tangibles”

4. How much cash is left over each month?

When you first start out on your wealth-building path you will generally start with very few “tangible” assets – you have skills, qualifications, drive and determination, perseverance etc. but you have very little in terms of assets – cash, investments, etc.

There are two main ways to increase your personal wealth – earn more than you spend and grow what you already own. Don’t count on inheritances as they may never come – the cost of residential care for the elderly will wipe out the majority of inheritances in the current economic and demographic climate.

Budgeting – Needs and Wants

Most people, us included, will have a set monthly income and expenditure. Have you actually analysed what you have coming in and going out each month?

It would be wise therefore to sit down and go through bank statements, bills etc and work out exactly just what you have coming in each month and what you spend it on.

The title of this article is “Needs and Wants” – all our expenditure can be split between being either a “need” or a “want”.

Accommodation – a “need” for all of us – as is food, clothing, water, heat and light.

“Wants” – these are all the other things – we may “want” the top package from our satellite TV provider – but do we “need” it?

The goal here is to identify all those items which you buy on a monthly basis which are “wants” and not “needs” – for every transaction simply ask yourself “Do we need this or do we want this?”

If it’s a “want” – ask yourself – should I spend my money on this “want” now which will give me some short-term pleasure or should I save the money so I can have more “wants” tomorrow????

This article links into the other article – “Pay Yourself First”

Please let me know what you think? Have you sat down and gone through and identified where you are wasting money each month – an increasingly important activity for many people with the “credit crunch” and current economic climate.