Detailed Explanation
Financial projections are forward-looking estimates that help you anticipate future outcomes. They use current data, assumptions about growth rates, and expected changes to model where you’re headed financially.
Types of Financial Projections
Net Worth Projection: Estimating how wealth will grow based on savings rate and investment returns.
Retirement Projection: Calculating if savings will support your desired retirement lifestyle.
Goal Projection: Modeling timeline to reach specific targets (house, education, FI number).
Cash Flow Projection: Forecasting income and expenses over upcoming periods.
Key Assumptions
Every projection depends on assumptions:
| Variable | Conservative | Moderate | Optimistic |
|---|---|---|---|
| Stock returns | 5% | 7% | 9% |
| Bond returns | 3% | 4% | 5% |
| Inflation | 3.5% | 3% | 2.5% |
| Salary growth | 2% | 3% | 4% |
Scenario Analysis
Run projections with multiple assumptions to understand the range:
- Worst case: Low returns, high inflation
- Base case: Historical averages
- Best case: Strong returns, low inflation
Examples
Retirement Projection
| Input | Value |
|---|---|
| Current savings | $150,000 |
| Annual contribution | $25,000 |
| Years to retirement | 25 |
| Assumed return | 7% |
| Projected value | $2,100,000 |
Financial Independence Timeline
- Current net worth: $100,000
- Annual savings: $40,000
- FI number (25× expenses): $1,000,000
- At 7% returns: ~12 years to FI
Goal Projection: House Down Payment
- Target: $80,000
- Current savings: $15,000
- Monthly contribution: $2,000
- At 4% HYSA return: ~30 months
Why It Matters
Projections transform abstract goals into concrete plans:
-
Reality Check: See if your current path leads to your goals-or falls short.
-
Early Course Correction: Identifying gaps years in advance gives time to adjust.
-
Motivation: Watching projected wealth grow encourages consistent saving.
-
Decision Support: Evaluate how major choices (career change, house purchase) affect your trajectory.
-
Stress Reduction: Knowing you’re on track provides peace of mind.
Financial planning tools that project your net worth, retirement timeline, and goal progress turn vague hopes into actionable plans with clear milestones.