Fundamental question/concern needing clarification
hi... this is obviously a superb software program, one that i've been comparing to my previous favorite retirement planning program (Retirement Savings Planner from torrid technologies). This latter program does have the problematic issue of asking you to pre-define a desired yearly income, but it has the significant advantage of transparency, in which visual graphs and spreadsheets indicate the relationship among all data and can shift instantly as you change or input data. I'm not sure which is the better program yet, but i'm increasingly impressed by ESPlanner, and it has a superior pedigree, and the support is impressive.
However, one area which seems to create a stumbling block for a lot of subscribers is in defining 'special expenditures'.... there have been many efforts to do so, but there is no clear distinction between 'fixed' or 'added' or
'temporary' or many of the adjectives trying to distinguish 'special' from 'routine'. Cars? Vacations? Food? Etc. There is a level of subjectivity and overlap which is disconcerting.
For example, if my wife and i (with our 3 children) can define our monthly (and yearly expenditures) down to the dollar for any set of years
and note the change in amount for any set of years right up to our deaths, then i imagine we could reliably put this in the 'special expenditures' category. If we can do this for food, for utilities, for car, for house repairs, for dining, for camps, even for linens and dvds (if we were that obsessive), then could these not be put in the special expenditures list? Indeed, if we have salaries that we control (which we actually do as self-employed professionals) and a non-taxes, non-mortgage, non-investments, non-sep, etc. budget that we spend each and every month (which in our case is about everything we have left, including an ongoing credit card debt of about 1000 a month), then why wouldn't we just post the full amount of our nearly unvarying spending (i.e., the lump yearly sum) in the special expenditures box? or perhaps reduce it by some amount as each child leaves, etc.? Shouldn't that theoretically lead to the same predictions?
This is long now, so later I'll post some other (shorter) basic questions not yet clarified for me in your literature and forums. Thanks very much. I'm eagerly looking forward to the discussion. best regards, charlie
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Charlie,
Basically, special expenditures are every bit of spending for which ESPlanner doesn't have an input screen. They are primarily intended to be used for big ticket items (college expenses, car purchases, trips, whatever) that you know will be part of your spending but are unreasonable for us to formalize by giving them their own input screen. The three tax classifications, excludible, deductible, and taxable are to handle taxation issues like gifts (excludible or deductable from AGI depending on the gift) or college expenses (AGI remains unchanged). Anything you don't account for in terms of special expenditures is wrapped up into consumption which is pretty much your disposable income. Usually because of the size of a special expenditure it has a significant effect on your financial planning, purchasing groceries doesn't really count, buying a new car every 3 years does.
Clearly, the more closely you can model your spending via the special expenditures interface, the more accurately you can determine your consumption, but there is a limiting factor. ESPlanner paints an accurate, but broad, picture of the future, trying to use it as a fine grained budgeting tool is probably more trouble than it's worth. You need to balance the effort of maintaining an accurate representation of your expenses for the rest of your life against any additional accuracy gained in understanding your consumption.
As long as your total household expenses (other than those that show up in the spending reports) are smaller than your consumption, you're in good shape and living within your means.
I hope this helps.
Best,
Dick Munroe
thanks, dick... that is helpful but let me pursue this just a bit further with two questions: 1) is it not true that, theoretically, if one carefully budgeted (and could predict) yearly costs for nearly everything from food to entertainment to electronics to college, etc. etc. and placed this items correctly on the special expenditures list, that it would still result in an an equivalently accurate assessment of future spending/needs as if you left some of it out to be included in the consumption/discretionary spending assessment?
2) we pay 400 a month to lease our car (no down payment was required)....we spend 1500 a month to feed our family (of 5)....
i'm not sure i can see a clear distinction between what's discretionary and what's a special expense. Am i right, then, that it is a gray area and subjective to some degree..... and, if so, what harm is there in putting all big, regular costs in the special expenditure grid (making accomodations for sure when children leave and circumstances change over the years)?
sorry to be obsessive about this, but perhaps these questions will help clarify things for others too. thanks again. charlie
I don't think they are "obsessive" questions, just conceptual questions about the purpose or scope of the program. I think you are right about the subjective side of it. Dick is pointing out the sort of scope and purpose of the program--it works at an annual level and thus it's a kind of macro take on your life income and consumption. Here's how I think about your question: if I try to put too much in "special expenditure" it makes the bottom line ("living standard") less meaningful to me because I have to read "living standard" as not including u, v, w, x, y, and z. If something is truly "special" like a college cost or something, then I prefer that this not be confused with my normal living standard and thus I put it in special expenditures. Then I read "living standard" result and I know that "unusual" number is not included. But to me, groceries and car payments and stereo equipment ARE my living standard and thus I want to read "living standard" as MEANING money I spend on those things.
I don't know if that helps. In other words, you in one sense define what you MEAN by living standard as a result of what you include and don't include in special expenditures.
Imagine that you put all of that detailed stuff that you described in "special expenditure" (effectively taking it OUT of what you mean by "living standard). Now what is left is what you mean by living standard. If that is what you want living standard to mean, then do it. But I think it's much easier and more helpfult to let living standard mean all the discretionary spending that remains after the very big ticket and unusual items like colleege. If you want to get more fine grained than that, then you are really more into monthly accounting in my view.
But that's how i think about it so perhaps that helps you to think about it too. I hope so!
Dan
dan... that does help, thanks, although it is a bit disconcerting that from the hard world of economics comes a kind of subjective choice about how to conceive of 'standard of living'.
I have some perhaps more basic questions about the program that i want to get to, but let me stay on this topic a moment from a more personal perspective.
My family budget is 'fixed' to the extent that we spend every penny of income (two self-employed professional incomes) and that our professions (psychoanalysts) are fairly unvarying income-wise (which is as we choose, since we have schedules built in part around our children). For nearly a year now, we've been spending beyond our income by about a thousand a month (it is delightful that esplanner suggests we can stop contributing 15000 a year to our SEPs and can draw down from our savings....but of course I remain skeptical for now, as the risks of being wrong are great).
So there is an appeal to me of putting the appropriate income numbers in the 'special expenditures' box and seeing what opportunities the program 'suggests' for getting out of our tight financial restrictions (and as i said, the program is very hopeful here). Indeed, one scenario had
our recommended 'consumption' figure at Zero, but had our current consumption figure at (25,000)... There are so many ways, it seems, to carve out the future scenario that it is a bit frightening. I guess that if we put everything carefully budgeted over all the years into the 'special' box (from food to wine to, say, the price of a trip to the galapagos when we are seventy, etc.) AND if the recommendations still say we have a few thousand left for consumption, there is a certain safety in that....even if, as you say, it is more like a budget plan.
There is a question in all this:
Perhaps I'd feel more comfortable with a more flexible consumption/standard of living amount, if I had a better sense of how the program computes its idea of a recommended consumption level.
Is this drawn largely just from the fixed variable of the current income figure?? And what if, as in our current case, current income is insufficient (by a thousand a month) to maintain a debt-free standard of living? Should I be indicating somewhere that we need 12,000 more for a balanced budget, or put it in 'special costs'... And what if current income is completely anomalous: say, half or twice the 'normal income'.
I'm sure this has been covered somewhere, but I haven't been able to reassure myself that the 'recommended' consumption level draws its conclusions from all the appropriate variables.
Perhaps you can reassure me about this. thanks again. charlie
p.s. i promise shorter posts in the future
Yes, remember that "living standard" is not really ill defined or fuzzy here. It's presented in two forms: "consumption" and "per person living standard." the latter takes the former and scales it to the number of persons in the household, including children.
I do think it will help you to see how that number is related to the other numbers in the reports. So you can go to the Regular Assets tab in the spreadsheet report and see that you have Total Income, Spending, Taxes, etc. Then you can look at the Spending tab in the spreadsheet report and see that Consumption is the amount remaining after housing, special expenditures, etc. (see that sheet). So in this sense, it's more simple than you are perhaps making it.
Consumption is the discretionary spending you have after some major off the top expenditures (and any special expenditures you indicate). The program is really showing you how your economy works from one year to the next and across the upcoming years and decades. It's not going to describe your economy for this month or the upcoming months. It's unit of measure is annual. So that's why, in my view, you don't really need to fill the special expenditures with all of those details. You can do that as a sort of side calculation I guess to make sure that the consumption (living standard) available to you for the year is workable for you. But it seems like pressing it with that fine grained expenditures is not telling you that much more. You are in effect trying to squeeze more detail out of it than you really need.
--Dan
thank you very much, dan. this is a marvelous program, as is the support.
charlie
next question (i promise you, i've been through all the forums and the help manual a few times....yet i'm sure this must be a question you've been asked a million times):
on the tab where you can indicate 'maximum indebtedness', i can understand theoretically how one might use this to smooth things, BUT where is that debt coming from?
do i take out home equity? does it indicate how the debt is incurred? and why not just set it at a million or two... will the program detect whether that is a feasible or even a good idea?
in principle i have no problem borrowing against future earnings/profits etc., but what's the downside to that? thanks, charlie
I might need help from one of the engineers on this question, but my understanding is that this indicates the amount you are willing to borrow (and it doesn't care where you borrow it from--your cousin, the bank, HELOC, etc).
Increasing this amount will allow the program to add to your "regular assets" and it will do so if it needs to in order to smooth your income. If you are not "borrowing constrained" then it won't borrow. It assumes the interest rate on the loan is the same that you have indicated as an interest rate for your regular assets in assumptions. So if you already have a smooth living standard, indicating the willingness to borrow won't change anything.
Perhaps that's just a partial answer . . .
Dan
morgancharles at earthlin wrote:thanks, dick... that is helpful but let me pursue this just a bit further with two questions: 1) is it not true that, theoretically, if one carefully budgeted (and could predict) yearly costs for nearly everything from food to entertainment to electronics to college, etc. etc. and placed this items correctly on the special expenditures list, that it would still result in an an equivalently accurate assessment of future spending/needs as if you left some of it out to be included in the consumption/discretionary spending assessment?
Yes. The effect you would see is a transfer of money in the Spending report from consumption (the general category) to special expenditure category. There should be no (or little, depending on the special expenditures) change in the total consumption or standard of living.
morgancharles at earthlin wrote:2) we pay 400 a month to lease our car (no down payment was required)....we spend 1500 a month to feed our family (of 5)....
i'm not sure i can see a clear distinction between what's discretionary and what's a special expense. Am i right, then, that it is a gray area and subjective to some degree..... and, if so, what harm is there in putting all big, regular costs in the special expenditure grid (making accomodations for sure when children leave and circumstances change over the years)?
This is a potato/potatoe issue. From my perspective, your car lease is discretionary and subject to change (buy a car, lease a different one, use public transportation, etc). Your food bill isn't (don't buy food and you die). To me, your car lease is a special expenditure, your food bill isn't. You see things differently than I, so you categorize your spending differently.
As I said before, it's also a work function issue. How much work do you want to put in to make sure these numbers stay accurate (changes in local cost of foods, etc)? If they only change with inflation, cool, ESPlanner can handle that; ESPlanner can't handle different rates of inflation (thus the difference between the core rate of inflation and the actual rate of inflation reported by the government and the Mark Twain adage about liars and staticians) and you'll have to re-enter them from year to year (as well as doing your own inflation research). Not necessarily a bad idea, but certainly a lot of work.
This sort of planning isn't something you do once and put on auto-pilot. You should re-plan periodically (depending on investments, housing cost changes, other large changes in your financial situation) and change course if necessary. So the more you pack into special expenditures that really aren't "special" (for a local definition of special) the more work you incur when the re-evaluation of the plan occurs.
Best,
Dick Munroe
morgancharles at earthlin wrote: on the tab where you can indicate 'maximum indebtedness', i can understand theoretically how one might use this to smooth things, BUT where is that debt coming from?
do i take out home equity? does it indicate how the debt is incurred? and why not just set it at a million or two... will the program detect whether that is a feasible or even a good idea?
Charlie,
Dan is correct, the source of the borrowing is "thin air" at the regular asset rate of return. It's your job to actually acquire the loan and tell ESPlanner about the costs of it if that differs from our assumptions (yet another use for special expenditures). What ESPlanner will do in the non-borrowing-constrained case is to assume that you can borrow, purchase enough life insurance to cover the loan in the event of your death (if necessary) and repay things all behind your back.
In your case, you're claiming you are running about 12k/year in the hole. ESPlanner has told you how to manage that and maintain a flat standard of living. You don't want to change anything about your current cash flow so your problem is how to get ESPlanner to make different suggestions in the presence of that 12k/year hole.
Frankly I'm not 100% sure about how to get it to do this so I'll see if Larry can chime in here. I would enable maximum indebtedness to some "large" value and add a 12k/year special expenditure and see what happens.
Best,
Dick Munroe
Special expenditures are non-discretionary -- spending you just have to do no matter what. Examples here are paying for your child's college tuition or your daughter's wedding. Taking a trip around the world would not be a special expenditure unless you have your heart completely set on it. Whatever you decide do constitute non-discretionary expenditures, you still have to decide how large to make those expenditures. You can stay in 5 star or 3 star hotels on your around-the-world trip. You can enter the 5-star trip and see how that affects the level of your living standard (your discretionary spending per equivalent adult) versus taking a 3-star trip around the world.
Hope this helps.
best, Larry