Forecasting Future Expenses

With every new year come resolutions to lose weight, exercise regularly, call your mother more. Have you also resolved to become financially fit? If so, then you have a specific action plan which you update at least annually. And you have a good handle on what financial resources you will need to achieve your life objectives.

Common life objectives that my clients often share with me are planning for retirement, helping a child or grandchild pay for college, and purchasing a second home. In order to plan effectively, you’ll need specifics around cost and timing, and the more specific you are the more likely you will successfully meet the objective.

Let’s use college as an example. How much of baby Sally’s college expenses (tuition, room, board, books, computer, activity fees, etc.) do you want to pay? 50%? 75% 100%? How much will those items cost? Well, Sally may go to a state school or a private school. It may be in the city or it may be in a small town. She may get a full-ride scholarship or she may get no financial assistance. And - goodness! - some of those costs will fluctuate quite a bit year to year (for example, on campus versus off campus housing). What if Sally decides not to go to college at all, or takes a year off to tour Europe and find herself.

Uh oh…that’s a lot of variables (and you have no clue what the right answers are). Being specific is pretty hard, right?

So what do financial pros do? Keep calm and carry on is what we do. We make reasonable guesses based on relevant information that is available today; that is known as a “base case” scenario. And we also make a “worst case” estimate, where costs are on the high end. And, occasionally, a “best case”. The truth is somewhere in between those three outcomes, and it will nearly always be slightly different than what you planned so carefully for. But - with two or three scenarios specifying the amount and timing of different planned expenses - you can then put a plan together to meet the goal and be reasonably assured that you will achieve it.

In my next Financial Fitness installment, I’ll cover how to put a college savings plan together (after you know the timing of the different expected future outflow). I know…riveting stuff! So if there is a different financial topic that you have a question about, just email me at stu@bendwealth.com and I’ll cover it in a future article.