Not sure how a financial decision you make today will affect your future finances? Do a what-if analysis to see how spending or saving money affects your financial planning.
What-if analyses are used to examine how spending, saving, taxes or investing money will affect your finances in the future by comparing two or more financial scenarios. For example, buying a new car may seem perfectly affordable right now, but plugging income and expenses into a what-if analysis tool can reveal that the auto loan payment will put your financial plan into the red next year.
Another example of a what-if analysis is taking a look at how different levels of monthly contributions a 401k or other retirement fund will reduce your income now, and how it will affect spending with increased income in your retirement years.
Some examples of personal finance events used in what-if analysis:
- Different loan packages.
- Monthly income decreases or increases.
- Paying off a debt early.
- Refinancing to a loan with a lower interest rate.
- College tuitions.
- Buying a smaller home during retirement years.
- Cutting down on trips to the coffee shop or on hobby spending.
- Reducing transportation costs.
- Vacation options.
- Wedding planning.
Businesses use what-if analyses to determine how different costs or investments will affect profit and other financial indicators. A business may also use these scenarios to examine different pricing models, warehousing options, number of employees or raw materials options.