Entering Debt in the Projections
When entering annual spending in the After-Tax Spending column, do not include debt annual payments as those are already factored in automatically based on the debt you have entered on the Debts page (as shown below).
You can access the Debts page from the Scenario Setup section.
Add a new debt to the table by clicking Add Debt. Complete the data entry with specifications such as the balance, interest rate, monthly payment amounts, whether the debt is joint, and more as indicated by the column names shown below.
If you have a nominal rate with a different compounding period, you should convert it to an effective rate, and then convert the effective rate to a nominal rate compounded monthly. For example, if a nominal semi-annual mortgage rate is 5.00%, the rate in Snap should be 4.95%. You can use a financial calculator or an online calculator such as Wolfram Alpha.
However, according to FP Canada's Projection Assumption Guidelines, "it is also sensible to use a long-term borrowing rate assumption when projecting the impact of debt on a client’s financial position over the longer term". Instead of entering the loan's current interest rate, use a long-term borrowing rate. Click here for details on how to use these projection assumption guidelines in your scenario.
On the Planning page, the annual debt payments are displayed under the Debts column. For jointly owned debts, each spouse is assigned half of the annual payment. The Amount Owing is the amount owing at the end of the year.
When you enter a debt, the annual debt payments are automatically subtracted from the client's cash flow.
Here is a simple example of a debt of $41,000 which is paid off within the first few years of the projections.
In the first year of the projections, you can see that the $900 monthly payments equated to $10,800 paid over the year. At the end of the first year, the Amount Owing on this mortgage is $31,038. After paying the $10,800 in debt payments, $22,701 in taxes, and $4,056 in CPP/EI deductions, John is left with $62,443 for his After-Tax Spending from his $100,000 Employment Income.
Note: Snap will not automatically sell real assets (ex. House) to pay for the debt. Therefore, if a client is in this situation, consider running a scenario where they sell some of their real assets to eliminate the debt. For example, they can downsize into a smaller home. Here are more details on how to sell a Real Asset in a projection.