- 1). Assess all of the factors pertinent to the equation. For example, if you need to know how much you are going to spend on a new car, you need to add in the actual cost of the car, insurance, repairs, property tax, parking, gasoline and any other expense that you will automatically incur as a result of this purchase. If you are projecting an investment's growth rate, you will need to know the amount of initial principal, the rate of interest or growth, the number of compounding periods and the amounts of any subsequent payments in order to determine how much money you will end up with.
- 2). Purchase and learn to use a financial calculator. This skill will be invaluable when you make choices among different types of investments and loans that involve long-term cash flows. Most financial calculators come with instructions that clearly show how to use them, and there are also more comprehensive manuals available for some of the more well-known models. Read through one of these and learn how they work; the time spent can save you thousands of dollars through your enhanced ability to make financial projections.
- 3). Use reasonable assumptions and do your homework when you make financial projections. For example, do not assume that your investment portfolio will average 20 percent growth per year; this is not realistic. Think carefully about how much money you will really need during retirement; you are not likely to live very well on a $50,000 retirement fund if you retire at age 65, even with Social Security. Use your financial calculator to project how much you will need to save to accumulate $1 million or at least a half-million dollars.
- 4). Find a financial planning program on the Internet that can allow you to plug several variables into an equation to make more complex calculations. If you have a retirement plan with a specific allocation of mutual funds or other investments, then you can enter the amounts of each investment into the program along with a projected rate of growth. There are many programs available that vary widely in terms of cost, complexity and clarity; do some research to find one that you can afford and understand. But this type of program will be necessary if you are doing any type of large-scale retirement or financial planning that involves several variables. A financial calculator will not be sufficient for this type of analysis, because several cash flow equations must usually be performed simultaneously, such as the effect that funding a college education will have on one's retirement portfolio.
- 5). Run a few different illustrations on your program or calculator using somewhat different assumptions, so that you have a range of results that could be possible. For example, if you want to know how much your annual IRA contributions could grow to by age 65, run a few calculations showing slightly varying amounts of contributions and investment returns. One calculation could show you making the maximum possible contribution each year, while another could assume half that amount. The first calculation could also assume that the money grows at 5 percent per year, while the latter shows growth at 8 percent annually.