I heard that any difference in Year 0 CF (salary > living expeneses) would contribute to the asset base for the return calculation for Year 1. But in any question I’ve done so far the expenses are exactly the same as the income. Is that correct? Is there any example where income is higher than expenses in Year 0?
Maybe I’m completely off track with this question. Sorry.
In this case you will probably have other expenses such as funding school for kids, taking care of a relative, etc… That will leave you with a net negtive cah position at the end of the year and the need to generate some extra returns with the portfolio.
If not, they would use this extra cash to fund some future project (charitable gift, estate…) and that will dimish your annual return requirement. Say i need 100 in 2 years and i currently have 50 in my portfolio but i have 20 extra cash every year: my return needs to be 4.6%. instead of 41% without the extra cash