Forum Discussion
How to Account for Inflation
Attached I show an account balance forecast going out 20 years. But 20 years from now, $176,560 won't feel like $176,560 feels today. So how can I reflect a 3% annual inflation rate in each of the years?
Each year's balance is based on many "ins and outs" of money, so I can't just calculate using a rate of return less inflation.
Thanks in advance!
3 Replies
Thanks Mathetes! I hope you had a great summer of kayaking!
Sorry, I attempted attaching an excel file. Not sure why it did not work. Let me know if it attaches this time.
My actual worksheet is very much like the one you attached, but my attachment is a simplified version.
Using the example you attached, I'm looking to apply inflation to each year's EOY Bal to answer the question, "what will be the buying power of each year's EOY Bal, given X percent inflation each year. In my attached, I reference a cell that is set to 3%, but can be changed, as you suggest.
Hi,
Try this formula in cell C4:
=B4 * BYROW(SEQUENCE(ROWS(A4:A23),, 0), LAMBDA(a, (1 + C1) ^a))Hope this helps.
IlirU
First of all, there's no attachment, so it's hard to visualize how you've laid this out, to say nothing of how you incorporate the various "ins and outs," how many "ins" or "outs" there are.
That said, I'm attaching one way to do it. You'll notice that I created a table off to the side, a table in which you can make different assumptions for different types of "ins and outs." You should always use a table like this, rather than doing what's called "hard coding," where you would put your 3% assumption into each formula where it applied. Using a table allows you to test assumptions, change scenarios, without revising the formulas; you just change an assumption.
This is a very simple example. You can enhance it to your heart's content.
Let me know if you have questions or need further clarification.
