What-If scenarios are used to examine how spending, saving or investing money will affect your finances in the future. For example, buying a new car may seem perfectly affordable right now, but plugging income and expenses into a what-if scenario can reveal that the auto loan payment will put your financial plan into the red.
Another example of a what-if scenario is analyzing how different levels of monthly contributions a tax sheltered retirement fund will affect your spending with reduced 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 scenarios:
- 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
- reducing transportation costs
- vacation options
- wedding options
Businesses use what-if scenarios to determine the effect different costs or investments have on profit and other financial indicators. A business may use a what-if scenario to analyze the financial effects of different pricing models, warehousing options, number of employees or raw materials options.