Children
I don't understand how the children's spending works. Presumably if I set a living standard coefficient, then that percentage is spent on the children as a fraction of a full adult's consumption?
The reason I ask is that I cannot easily disentangle spending on myself from spending on children.
I presume this is the reason that the program is claiming that I am consuming at a level that seems unrealistically low? It already assumes that I am spending some fraction of that number on the children and nets it out as an expense? Is that right?
I would like to understand the projections so that total spending/consumption -- net of mortgage and taxes and savings -- becomes just TOTAL expenditures, including spending on children outside of college.
RSS
The CONSUMPTION column is household living standard, including children; the LIVING STANDARD PER ADULT, is the final, smoothest consumption available. Of course if you change the relative cost of children to 0% in the assumptions folder, you'd see that household consumption and per adult living standard are the same.
But doing that would be unrealistic of course because children are a drain on household consumption.
So perhaps what you are puzzling over is the difference between household consumption and per-adult living standard? You can adjust that relationship in the assumptions folder in the tab called "cost of children."
If consumption is quite low, check to see if the program is recommending some significant saving in order to smooth consumption. If it is, what that means is that you have to save in order to keep your living standard smooth. If you spend now what it recommends you save, then you'll have a higher consumption (living standard) now, but a lower living standard later.
Does that help?
Dan
Recommended total consumption expenditure is everything you are supposed to spend on consumption for you, your spouse, and your kids. Doing so will deliver the corresponding living standard per person.
The formula relating total household consumption and living standard per person is this:
C = S multiplied by the quantity (N + .7 K) raised to the power M. In this formula, C stands for total consumption, S for the living standard per person, N for the number of adults, K for the number of childern, and M is a coefficient governing the economies of shared living. The formula is more complicated if the relative cost of kids differs by age. Our default value for M is .678071905. If there are zero kids (K=0) and N = 2, we have C = S x 1.6, i.e., 2 raised to the power .678071905 equals 1.6.
If N equals 1, then C = S. So in going from 1 adult and zero kids to 2 adults and zero kids, the consumption needed to provide the same living standard S rises from S to 1.6 times S. I.e., two can live as cheaply as 1.6. When kids are present, the ratio of C to S is no longer 1.6 when N=2. The larger is K, the small is the ratio, meaning that the degree of economies of shared living is non-linear -- it depends on family size. Bigger families enjoy more economies of shared living just like going from one person to 2 people (from N = 1 to N = 2) changes the economies of shared living (the ratio of C to S) from 1 to 1.6.
Thanks Larry. Now that i see the formula, I can try to adjust parameters I input to model what I think is "right." In my view, most of spending on children (above the poverty level minimum) should be considered "consumption" for the parents since it is part of our choice to have children and to raise them in a specified way. But tastes will vary on this, and your decisions about the default model are probably right for the average family.
I might try a benchmark case where I treat the family as a single individual, assigning arbitrary special expenses for college tuition and large health shocks and the like to see how that affects the results.
So if my calculations are correct, raising the coefficient on kids raises the recommended consumption because your costs will drop more once the kids are out of the house. In contrast, assigning a very low coefficient on kids means there's little change in costs once they grow up, hence recommended consumption is lower in these scenarios. Have I got that right?