Click New Accounts File on the File menu. This will create a new account with all amounts set to zero.
Initially we only want see the effects over one year
so click "1" in the Years dropdown
list.
Ensure that the Salary button is in the
down position, so that the text box is editable, and the Salary figure is
included in all calculations.
Now enter a figure of $10,000 in the text box and press the ENTER key.
Notice that the first year's salary is added to the balance for the following
year (see table and chart).
To the right of the Salary text box is the Indexed checkbox.
When this is checked it indicates that future values of Salary will
increase to keep pace with inflation
- at whatever rate you have set on the Inflation/Tax tab.
For the moment lets leave the box checked (program default) to indicate
that we expect our salary to increase over time, roughly in line
with inflation.
Generally this holds true.
Now click on the Tax/Inflation tab (under the main Account
Details tab) to reach the control to set the inflation rate.
Make sure the Inflation button is in
the down position. This causes all calculations to reflect whatever inflation
has been set, and allows the inflation rate to be edited.
Enter an inflation rate of 10%, either by typing in the number
(and pressing the ENTER key), or by using the
clickspin arrows. This rate is fairly pessimistic but it makes the
example easier to follow. At this time also make sure that the Today's
Values button
is up, so the values for future years will not adjust
to show what they would be worth today.
Look at Net Salary row in the table. Notice that the Salary
for next year has risen by 10% so that we shall be earning $11,000
instead of 10%. That simulates the indexing of our salary.
Now click on the Today's Values button,
and look at our salary for next year. It shows that, in real terms
- the purchasing power that is - our earnings have the same value
as last year, the equivalent of $10,000 at today's prices. So, by
having an indexed salary we are just compensating for the effects
of inflation.
OK. Now try the same example but this time, in step 8, uncheck the
Indexed checkbox to see what happens if there is inflation,
but your salary remains constant. Its not good news.
Finally, try playing with the Years control
to see the effects over a longer period of time.