Wednesday, August 8, 2018

Revolver Method (part 2)

In order to account for inflation, there are a few methods. You could go with government figures but I believe those figures are vastly under estimated. After all, inflation will affect everyone differently. The most meticulous way to get an accurate measure of the inflation you experience would be to buy the same stuff over extended periods of time and calculate how the price changes however this is too meticulous for even myself.

This is why I really like to collect my own personal data. After several years of data are collected, you can track how your annual expenses increased or decreased over time. This is a better way of accounting for inflation.

The downside to this is that you most likely won't buy the same stuff consistently over time. You don't buy a car every year so to get a valuable data set, you need to collect data for a long period of time. The other weakness is that significant lifestyle changes will happen over a long enough timeline. Marriages, children, divorce, relocation, healthcare costs, tuition, etc will have a big impact on personal spending.

But again, forecasting is just done to get an estimate. A goal to shoot for. As significant lifestyle changes happen, forecasts should be updated to reflect such changes.

After as many factors are accounted for, you can finally get a good idea of how much money you need for the rest of your lifespan.

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