 Personal finance practice problem using OneNote. Projected health care costs. Prepare to get financially fit by practicing personal finance. You're not required to but if you have access to OneNote would like to follow along. We're in the icon left hand side practice problem tab in the 9090 projected health care costs tab. Also take a look at the immersive reader tool or practice problems typically in the text area too with the same name, same number but with transcripts. Transcripts can be translated into multiple languages either listened to or read in them. Information up top we are imagining we have current health care costs at $7,000 and we want to project what the health care costs might be in the future possibly for budgeting into the future. One way we might think about that is to try to guess or estimate what inflation is and assume that the health care costs will go up with relation to inflation. Now typically in the United States the Federal Reserve shoots for like one and three percent inflation. It could go above that at times but that's kind of what they're aiming for oftentimes in order to have enough money in the system to deal with the growth without having basically deflation which is something that could be a bad situation so they typically shoot for like one to three percent. So we're just going to assume that there's an increase of two percent of inflation which would mean that the purchasing power of the dollar is basically going down by the two percent which we can think about then the prices for things will basically go up by two percent per year. So how much would be spent years in the future, ten years into the future. So if we're going ten years out then a couple ways we could do this we could use a future value type of calculation multiple types of ways we could do a future value calculation Excel or using Excel functions is one of the nice easiest ways which I would practice doing and it would look something like this. I usually put a negative upfront you could put the negative within inside the calculation but the easiest fastest way to type it is to say negative future value the rate then we get this nice little box down below that help us pick this up is in B2 so the rate would be that two percent it's an annual rate so we're just going to keep the two percent the comma then would take us to the next argument which would be the NPR number of periods which would be represented here by the B5 which would be that ten years and then comma and notice that we don't have a payment because a payment would be an annuity calculation and what we want to do is have a present a future value of one therefore two commas to get us to this argument the present value in other words if we're currently at seven thousand what what's going to be the future value so that's the present value B1 and that gives us eight thousand five thirty three so if we're trying to figure out how much we might be paying in the future representing the fact that the inflation is going to go up or the cost is going to go up with inflation that we're assuming at two percent we're at eight thousand five thirty three in ten years so obviously that's just an estimate we're practicing our future value calculations or time value of money calculations to prove that or to think about it a different way we might run a table and say okay if we're at zero year zero at seven thousand year one it would be increasing right we'd be increasing by in essence the two percent so we'd be saying okay so we got seven thousand times point oh two that's going to give us the one forty plus the seven thousand is the seven thousand one forty after another year now we'd be at the seven thousand one forty it would go up by another two percent so times point oh two that would give us the one forty two point eight about one forty three if we add that then to the seven one four oh our prior amount that's going to give us the two seven eight two and then of course we'll take that it's going to increase by another point oh two percent which would give us one forty six or one forty five point six five more precisely plus the seven two eight three and there's there's rounding because the seven two eight three is rounded but that would get us about to the seven four eight four and so on and so forth adding another increase the increase going up because we have a prior balance that's higher and if we did that all the way down to ten years we would expect at year ten we're at the eight thousand five thirty three now this is a good way to do it because here you can see not only where we end at the end result but you can see the rise or the increase in price or in cost if we had the two percent inflation when budgeting you can see how this kind of eats into your current salary if your salary is not increasing with these costs then that's going to be a problem if we want to prove this with our present value calculation just to practice our present value calculations I could say okay if I have this end result of the eight thousand five thirty three after ten years if I use my present value calculation bringing it back down to the current period I can do that that should take me back down to the seven thousand I could do that with this calculation again I put a negative upfront because that's the easiest way to type it probably not the most proper way to do it but negative present value the rate then would be once again the two percent that's what's being represented by B2 comma the number of periods we're going to say is going to be ten periods comma two commas because it's not an annuity I don't want a series of payments but we're going to present value one one item so two commas and then I'm going to take that in number which is the eight five three three that gets us back down to the seven thousand so it's kind of the opposite you know of the future value calculation if I present value that back then I get back to the seven thousand you also might want to just to play with your present value and future value calculations set up your table a little bit differently so you might say for example in year zero you had seven thousand and then do a future value calculation instead of increasing it this way we can use a future value calculation for each period so it might look something like this we'd say that there would be a future value which would be negative I'm looking at this cell right here how did we calculate it we'd say negative of the rate so the rate is going to be what did I say the two percent and then the comma the number of periods this time the number of periods we're going to say this is just for one year out so notice I'm referencing this cell right here with the K3 it's going to move down as we go down to year two year three year four and so on so there's no absolute reference there and then two commas because it's not an annuity to get to the present value which we said was would be represented by by this seven thousand here so that gets us up to the seven thousand four one forty then we can take the difference here between the seven thousand one forty and the prior period seven thousand to get that difference of the one forty so just another way to format your tables that you might see using a future value if I did that in year two we'd have this calculation we'd have the same seven thousand in the base year or you may not even have this whole column you could just equals the base year for example year one for example and now we have two two years out but now we got the negative future value the rate is once again the two percent comma for a period is now referencing this K4 is referencing this two so it moved down from K3 to K4 notice that this first cell the rate did not move down because we put dollar signs before the B and the two making it absolute and then comma comma the present value is seven thousand notice that this one moved down from seven thousand to seven thousand if we were to eliminate this whole base year and just used like the current year we could make this last one absolute and reference just that one cell and then I take the difference between the two the seven to a three minus the seven one four zero to get the one thirty the one forty three and so we're repeating same data here so we could do that again here we would be taking the future value of the seven thousand at two percent rate for three periods right and then you've got the difference between this and this and so on and so forth so this is another way that you can in essence I construct the same data getting down to the bottom line after ten years that we saw once again was at the eight five three three so good practice on the you know few on the time value of money calculations always great tools to be practicing with and working our mind around