The Household Balance Sheet utilizes a discounted cash flow model that compares the present value cost of the client’s future spending goals to the current value of the client’s resources to determine if the client’s goals are affordable. By looking at a client’s complete financial picture in present value terms, the Household Balance Sheet provides a strong indication of whether the client will be able to fund their future spending goals given the resources they currently have on hand or expect to have.
Present Value Calculations
As a discounted cash flow model, the Household Balance Sheet performs present value calculations on future income and spending goals to represent those items in today’s dollars.
The Household Balance Sheet supports two kinds of present value calculations:
- Net Present Value
- Actuarial Net Present Value
Depending on how a plan is setup, the Household Balance Sheet will utilize one or both of these methods to determine the present value of future income resources and spending goals.
Net Present Value
Net Present Value (NPV) is a straight present value calculation of a future stream of cash flows that is either received from an income resource or spent to fund a goal. In certain circumstances where the cash flows are deemed to be pre-tax, the present value amount of the item may be reduced by the present value of future deferred taxes resulting in a net present value for the cash flows.