Tyson here, the founder of OnTrajectory. First, all of us on the OT Team wish all of you in the OT Community a wonderful 2021 – we hope any deferred wishes from 2020 finally come true 😉
The rest of this post may not be for everybody, it’s a bit long and deals with a somewhat abstract topic – but I hope you’ll take the time to read it anyway. The long and short of it is we’re recommending a change to one of our default settings. Go to Menu / Settings / Calculation Options and uncheck the setting “Deflate past Income, Expenses & Contributions”.
Here’s why we recommend this change…
As I’m sure you know, OT lets you work entirely in today’s dollars. When you enter an Income, Expense or even a Contribution whether it’s for this year or 10-years in the future, you do so in today’s dollars. You don’t have to think about what something will cost or what your money will be worth in the future – you just put the numbers in based on its value today and OT deals with inflation (so you don’t have to).
And of course, that’s a good thing, but I remember when I was first prototyping, I just wanted to display everything in tomorrow (or actual) dollars. I didn’t want to have to deal with inflation at all. I felt it made it too complicated to bring-up the topic of today/tomorrow valuations, because if we brought the topic up, we’d make people have to think, and one of our goals was to keep thinking to a minimum. Not because OT users can’t think – but let’s face it – thinking can be a pain!
So we did everything in tomorrow’s dollars, and eventually we realized by doing that, we created a burden on folks – because now THEY had to think about the effects of inflation for every future decision they wished to model. So even before OT was in beta we introduced a central Inflation Rate.
Now, inflation is not assessed in the first year of one’s model, we start accounting for it in year-2, and at first that seemed to work great. Then I noticed something that unsettled me, when I logged on the first time after the turn of a new year, the Trajectory End Balance had a startling increase. This occurred because when the new year began, a year of inflation was “lost” – and by losing just one year of that “burden”, it caused a noticeable increase to my balance 50-years in the future. Such is the power of compounding 🙂
But although I noticed it, after discussion with the team, we decided it was okay because we increment in years – and that’s just the reality of the math when you move from one year to another. Then folks in the OT Community began to notice this “pop” too. And of course the bigger someone’s net-worth, the bigger the pop. Suggestions were made on how to “smooth” the situation so it wasn’t so jarring to move into a new year. About 2-years ago, we made the decision to create an option to “deflate the past” – and we set the default value to “true”.
What does it mean to deflate the past? It means that we take the actual inflation rate from the past year and recast past dollar amounts into today’s dollars, just like we do for future amounts. This has the effect of reducing past Income, Expense and Contributions when a new year begins, and it takes away the pop – you smoothly enter the new year with your Trajectory End Balance staying the same, or very close to the same. People stopped writing to us on New Year’s Day wondering why they went to sleep with a $500k end-balance but woke up to a $600k end-balance… and yet I always felt there was still something wrong with this approach.
As a result, I’ve spent many hours of my life pondering this setting – thinking about the effects on one’s model as one moves through time – and I’ve come to realize our original approach (to just accept the “pop” and move on) was the right decision all along! In simple terms what’s happening is that Tomorrow is becoming Today, whereas by deflating the past we are forcing Today onto Tomorrow. Yeah, I know, that’s a bit abstract, but that’s really what’s happening – and when the increase occurs, it occurs because we are gaining a kind of clarity on the future as time goes by, and we’re seeing the effect of an entire year, all in 1-day.
Now some folks may not agree and may not feel comfortable with the new year’s “pop” – it’s taken me time to feel okay about it – but my recommendation is that everyone go to Menu / Settings / Calculation Options and uncheck “Deflate past Income, Expenses & Contributions”. We’ll be defaulting this value to unchecked when new accounts are created.
If you decide to uncheck this option as I recommend, one side effect you may see (especially if you have a model that’s a few years old) is your current “calculated balance” may increase due to losing a few years of deflation. If it is significant, I recommend tweaking your past growth assumptions down slightly to be in-line with your current actual balances. Alternately, if you leave the setting checked, you will simply see that OT produces a more conservative estimate of the future than what reality turns out to be – and that’s okay too 🙂
In any case, thanks for taking the time to read all the way through and also for being part of our community – again, I wish everyone a fabulous and successful 2021!