3.1. Time span and inflation
Be sure to move the mouse over the question-mark near each field, to refresh in your mind what the field really is.
In building a financial plan, the first thing to establish is the time frame. As you will see, on the "Update" page, this is done by entering the starting year for your plan, and the number of years that the plan must cover. The start year needs to be the current year or a year no farther back than 1900.
The number of years for the plan is limited to 1 year to 120 years. This should be an ample time-frame, since a financial plan does not need to cover the years from birth to a typical person's income-earning years.
Another factor needed for the entire scope of the plan is an estimated inflation rate. Ideally this should be a random number between 1/2 to 20 percent, however, it usually ranges in the area of 2 to 4 percent.
Note that all rates, factors or percents are entered as hundredths, e.g., .01 is 1%.
3.2. Income
All dollar amounts should be entered as whole numbers (without cents). The primary driving bases of data that drive a plan (income, expenses, assets and liabilities), income is the primary essential one. Obviously, it's not needed unless there are expenses that need to be covered. But no financial plan would be possible without income. Even it you were independently wealthy, the assets come to you and remain capital, or frozen wealth, until it is set free to be used for life, to cover the needs of living. Assets would have to be turned into income. All income fields here are gross income values, with tax and benefit withholdings entered separately or calculated for you (at least income tax is calculated)
As this planning tool needs to cover a household, not just an individual, more than one source of income is provided. Thus there are two working income sources, job 1 and job 2. For an individual, this can be a full-time job and a second, part-time job, or two part-time jobs. They can be the separate jobs of two adults who live as a couple.
Other income is provided for to cover miscellaneous sources of income such as rental income, royalties, hobby income, Ebay sales, etc.
Yet another source of income is included to cover what ordinarily comes into play in retirement, but may overlap regular job incomes: 401K or pension income. At age 70 1/2 it is legally required that a portion of your IRA must be taken out per year (Minimum Required Distribution). Social Security payments may also be included, which may come due for disability and/or retirement.
3.3. Income factors
Each of the sources of income has an associated rate of growth and end-point years. These rates are in effect expected future "raises."
Enter the average rate of future expected raises for job 1.
Enter the average rate of future expected raises for job 2.
Enter the average rate of future expected raises for other income.
For IRA or 401K income, the inflatin rate, entered earlier, will be the rate of increase.
For job 1, job 2 and other income, enter the year in which income from these sources is expected to end.
For retirement purposes you may wish to try end-game options which are outright sale of your home or reverse mortgage or both. To turn on either option enter the number one (1), otherwise enter a zero (0). These take effect when liquid assets reach zero, which means you need to release the equity in your home for money to live on. The reverse mortgage will give you several years more time, but the outright sale may be the very best option. With the reverse mortgage you can in your hose with no house payments as long as you live, but with the outright sale, renting an apartment will be expected.
3.4. Expenses
- house payment (or rent, if you do not own your home or are not soon going to own one)
- groceries (which should include all foods and nutrients you eat at home)
- car payment (the annual total of your car loan payments)
- car insurance,
- gas oil and maintenance - all car and other transportation expenses
- utilities (including TV cable and telephone bills)
- savings withholdings,
- clothing,
- medical insurance (premiums paid)
- medical expenses - excluding what is covered by insurance and flexible medical spending
- flexible spending withholdings,
- IRA withholdings,
- vacation,
- other debt payments,
- life insurance premiums,
- car down payment - this is used when you fill out all the fields used for periodic car replacement
- income taxes and
- other expenses (any other expenses no covered above).
3.5. Periodic large projects
It would be unwise to ignore major expenses that everyone incurs some time in their lives, such as down payment on a house, repeated car purchases, remodeling, replacing appliances or furniture. In order to cover all of them, one must estimate the average total of such expenses per period (50, 10- or 15-year periods). First lay out a rough plan with dollar amounts for every time you might replace your car (double it for a 2-car household), and each of the other major expenditures of this type. Then make them close to the same amount for each period. Even though the "Update" screen and report outputs label all of these as car replacenemnts, you can interpret them as you wish, as alternating car, furniture, remodeling, etc. major expenditures.
CAR REPLACEMENT: The system will replace your car every n years if you enter the age of your current car, the number of years until it should be replaced, the estimated purchase price and optionally, a down payment amount, and car loan years (car loan rate is entered later). Note that the residual value of your old car is cashed out and is added to your checking account.
For any similar major expenditures or projects, you need to estimate when it will occur, using an age factor that indicates how long ago the last such project was, then how many years between such projects, the initial outlay or down-payment, and for major expenditures where this outlay is not large enough and you have to take out a loan, enter a loan interest rate.
3.6. Tax factors
In order to take advantage of this tool's income tax estimating feature, several additional data are required, which correspond to the same items you will use on your IRS form 1040:
- Adjustment to gross
- Itemized deductions
- Marital status
- Exemptions
- Tax bracket
3.7. Assets
- Checking balance
- Savings balance
- IRA or 401K balance
- Stocks value
- Bonds value
- Home value
- Automobiles value
- Other assets value
- Pers property value
3.8. Asset factors
- Appreciation rate - average annual increase in value of your home
- Checking account rate - the piddly interest rate on your checking account
- Savings account rate - the barely above piddly rate on savings
- Stocks growth rate - from 5 to 15 percent, depending on whether you invest close to the S&P 500 or beat them all
- Bonds interest rate - usually 5 percent
- Car depreciation rate - many cars depreciate 25 to 40 percent per year (use minus, e.g., -.20 or -.35) - wasting asset
- Other assets +/- rate - some of your art and antiques may go up +.10 per year, other items down
- 401K IRA growth rate - this could be .03 for CDs or .05 to .15 for mutual funds
Remember to estimate properly, keeping in mind that markets vary and some years many of these assets may go down.
3.9. Liabilities
Enter the current year beginning balances for your debts
- Mortgage balance
- Car loan balance
- Other debts balance - credit cards, personal, furniture, etc. loans
3.10. Liability factors
Here you want to enter the interest rates for your loans and tax and insurance included in your house payment:
- Mortgage rate
- Car loan rate
- Property tax - the average annual tax on your home
- Home insurance prem - your annual total home insurance premium
- Other debt rate - the average interest rate on all of your other debts