Real vs. Nominal Dollars

There are two important terms used in Snap to represent the value of money over time in the projection.

Nominal Dollars

Nominal dollars (also referred to as actual dollars) represent the actual amount of money spent or earned in a given year. For example, if you have a contract to purchase a home in 3 years for $500,000, that is the nominal amount (actual amount) of dollars you are going to spend in a future year. In Snap, the nominal dollar value is what drives all calculations. If $500,000 is needed in a future year for a purchase, then Snap's Cash Flow Management (CFM) tool will calculate the required withdrawals from accounts (all reflected in Nominal Dollars) to achieve this.

Real Dollars

Real dollars (also referred to as constant dollars or today's dollars) are reference values that help compare nominal dollars over time. Nominal dollars are important to know since this is the amount of money a client will need to have available to make a future purchase. However, nominal dollars only provide part of the story since prices of goods and services change over time (measured by inflation). In the example above, the $500,000 isn't owed for 3 more years, so we want a way to compare what this will cost us relative to a purchase made in a different year of our plan (for instance in our current year or in 20 years). For this purpose, we can use real dollars. The real dollar value adjusts the nominal dollars (actual spending) for the rate of inflation in the plan to discount the future amount back to a constant reference point as if the purchase was being made in the first year of the plan.

Example

Continuing with our home purchase example, in the first year of our plan, 2023, a $500,000 purchase would be reflected as $500,000 Nominal Dollars and $500,000 Real Dollars (since we're making the purchase today, we're using money as of the current year). The $500,000 Nominal Dollars in 3 years would reflect in Snap as ~$470,000 Real Dollars in 2023 (adjusting for 3 years of 2% inflation). This is done to give a sense of how much a home might cost today if you wanted the same size, quality, and type of home that will cost $500,000 in 3 years.

For most clients, you'll want to keep their real dollar spending constant throughout the plan. This will ensure that their overall lifestyle (groceries, transportation, hobbies) will remain relatively constant over time. The nominal dollar spending will increase each year of the plan to account for inflation. In the year 2024, the client will be spending $61,260 after tax, and this would be like spending $60,000 in 2023.