How to Model Fixed vs. Inflation-Adjusted Contributions

Question:

When planning contributions in ProjectionLab, how do I decide between “Today’s Currency” and “Actual Currency”? For example, if I plan to contribute a fixed amount every month for 10 years without adjusting for inflation, what should I select? What if I want contributions to increase with inflation?

Answer:

The choice between “Today’s Currency” and “Actual Currency” determines how your contributions are adjusted for inflation in your financial plan:

1. “Today’s Currency”: Use this option if you want contributions to adjust for inflation over time. For example, if you start with $500 per month today, the amount will grow annually based on inflation, keeping the purchasing power consistent.
2. “Actual Currency”: Use this option if you plan to contribute a fixed dollar amount that does not adjust for inflation. For instance, contributing $500 per month every year for 10 years would remain $500 each year in nominal terms.

This setting ensures your plan aligns with your real-life contribution strategy, whether you aim to maintain fixed contributions or adjust for inflation.