Inflation rate on MF

[Momtomouselover]

What kind of inflation rate are you guys using when calculating increase in MF over the life of the contract? I started with using 3% but then some quick calculations showed me that some resorts have had a much higher inflation rate than 3%. For instance BLT nearly 6% and AKL around 4%...is my math just off? If you calculate these kinda rates over the life of a contract (so assuming you won't sell) the price per night is quite high. Honestly the per point price pales compared to the MF over the life of a contract.

 

[CarolMN]

I'd use the CAGR (Compound Annual Growth Rate) for t the actual Maintenance Fees. You can find online CAGR calculators for that via Google and the data you need in the DIS DVC RESOURCE CENTER, post #5.

For BWV, for example:
Initial value, 3.70
Ending value, 7.17
# of periofs, 23

Calculator returns 2.92%

 

[Momtomouselover]

Those are the numbers I used to calculate a year over year increase and what I saw was that only a few resorts had an average 3% with most being higher like 3.5,5, or 5.7%. I was thinking this was the inflation rate over time. I'm definitely not a finance/economics person though. Its difficult because the 2019 increase really skews everything but it is what it is. I may need to ask a financial advisor for help but was trying to crunch lots of different possibilities.

 

[Momtomouselover]

Those are the numbers I used to calculate a year over year increase and what I saw was that only a few resorts had an average 3% with most being higher like 3.5,5, or 5.7%. I was thinking this was the inflation rate over time. I'm definitely not a finance/economics person though. Its difficult because the 2019 increase really skews everything but it is what it is. I may need to ask a financial advisor for help but was trying to crunch lots of different possibilities.

I'd use the CAGR (Compound Annual Growth Rate) for t the actual Maintenance Fees. You can find online CAGR calculators for that via Google and the data you need in the DIS DVC RESOURCE CENTER, post #5.

For BWV, for example:
Initial value, 3.70
Ending value, 7.17
# of periofs, 23

Calculator returns 2.92%

Ok. Thank you! With your example I see that I pretty much did the same thing I just didn't realize it was called CAGR and I went at it the long way. I calculated the year over year increase (for every year) then took the average of that. I came up with 2.95% for BWV.

 

[CarolMN]

AKV: 4.05%

BLT: 5.72%

SSR: 3.54%

A CAGR is probably more "reliable" (vary less) for future predictions than the more general inflation measures, especially for the resorts that have been open longer..

 

[Momtomouselover]

AKV: 4.05%

BLT: 5.72%

SSR: 3.54%

Great! Thank you. So what I see is what I did is calculate the CAGR but because I did YOY then took the average I could look at what it was prior to 2019 and also the first half of the contract vs. the second, etc. My numbers are very close to yours (I think off by 100s of a point due to rounding error I assume). I had 4.08% for AKV, 5.73% for BLT and 3.56% for SSR. Now, I need a crystal ball to see where it will settle. 2020 from what I am reading may be like 2019 but then where will it settle after that. It makes a HUGE difference in the MF over the life of a contract.

 

[CanadaDisney05]

I use 4%.

Make sure your also factoring in some sort of inflation rate on the "savings" side as well. Rack rates aren't going to stay stable for the next 30 years.

Also make sure your discounting future years for normal US inflation. If MF go up by 3% next year, but your income goes up by 2%, the real affect on your budget is only a 1% increase.

Fwiw, on my SSR contract which I will
alternate use in magic and dream seasons for 10 nights per year, my calculation spit out an average cost of $260 per night (in todays dollars). However, because I also expect rack rates to increase by 4% (double inflation), its actually equivalent to paying for a $160 per night hotel over the next 35 years. In other words, lets say a value costs $160 per night today, over the next 35 years without DVC I expect the cost to be the same as I would have paid buying DVC.

 

[Momtomouselover]

I must be far to negative in my number crunching. I am adding in the increase for rack rates, etc. but am having a hard time with the concept of rooms costing $800-$2000 for a "studio" over a 20 to 50 year time span. Its just a hard concept for my brain to accept that people will pay that much.

 

[Momtomouselover]

I use 4%.

Make sure your also factoring in some sort of inflation rate on the "savings" side as well. Rack rates aren't going to stay stable for the next 30 years.

Also make sure your discounting future years for normal US inflation. If MF go up by 3% next year, but your income goes up by 2%, the real affect on your budget is only a 1% increase.

Fwiw, on my SSR contract which I will
alternate use in magic and dream seasons for 10 nights per year, my calculation spit out an average cost of $260 per night (in todays dollars). However, because I also expect rack rates to increase by 4% (double inflation), its actually equivalent to paying for a $160 per night hotel over the next 35 years. In other words, lets say a value costs $160 per night today, over the next 35 years without DVC I expect the cost to be the same as I would have paid buying DVC.

Do you mind if I ask how many SSR points you have to assume 10 nights per year? I know it depends when you travel so maybe that is where my numbers are not so good.

 

[CanadaDisney05]

Do you mind if I ask how many SSR points you have to assume 10 nights per year? I know it depends when you travel so maybe that is where my numbers are not so good.

200 points for studios. Wifes a teacher so we travel summer. Idea is to alternate between July and late august trips (magic and dream seasons)

 

[CanadaDisney05]

I must be far to negative in my number crunching. I am adding in the increase for rack rates, etc. but am having a hard time with the concept of rooms costing $800-$2000 for a "studio" over a 20 to 50 year time span. Its just a hard concept for my brain to accept that people will pay that much.

Are you discounting everything into todays dollars?

 

[Momtomouselover]

Are you discounting everything into todays dollars?

No. Or I don’t think so. What do you mean?

 

[CanadaDisney05]

No. Or I don’t think so. What do you mean?

There is a concept in Finance called Time Value of Money. Basically, it means that a dollar today buys more than a dollar tomorrow. This is because as time go's by, costs of goods and services generally go up. For example, a chocolate bar used to cost 5 cents. Now, can you even get one for a dollar? Chocolate bars don't all of a sudden eat up 20x more of your budget. Its because the avg income has gone up by 20x as well.

The same concept works for DVC. Average US inflation is about 2% per year. This means that the average good and service goes up by about 2% every year. So if maintenance fees go up by 2% next year, but your income also goes up by 2%, theres really no effect to you. However, if maintnenace fees go up by 3%, its now eating a larger portion of your disposable income. But not not 3% more. Only 1% more.

So in order to make your projections meaningful, you have to "discount" the future year's cash flows (difference between rack rate and maintenance fees) into "todays" dollars.

The formula to do this is:

C/(1 + r)^n

C = periods cash flow
R = inflation rate (2% is conventional to use)
N = period number after start period. So if its 2019 today, in 2021 use 2. 2019 = 0, 2020 = 1, 2021 = 2, etc....

If you do this in excel, the formula is =PV(0.02,N,0,-C,0).

Sorry its hard to explain in a post. But it is important for the calculations to actually make sense

 

[Momtomouselover]

Thanks CanadaDisney05! I'll have to think about this more in depth and how to add to my sheets when I'm not so tired. I suppose I knew about this concept but didn't know how to incorporate it exactly (finance is not my thing). Thank you for the formula and explanation.

 

[mmmikey]

Curious on if you tried to handle any of the currency exchange numbers in your values? Been doing similar math for our recent foray into DVC but have not figured out the best way to factor in our CAD:USD rates.

So far I'm just taking comfort in the increased resale/rental value if the CAD tanks.

There is a concept in Finance called Time Value of Money. Basically, it means that a dollar today buys more than a dollar tomorrow. This is because as time go's by, costs of goods and services generally go up. For example, a chocolate bar used to cost 5 cents. Now, can you even get one for a dollar? Chocolate bars don't all of a sudden eat up 20x more of your budget. Its because the avg income has gone up by 20x as well.

The same concept works for DVC. Average US inflation is about 2% per year. This means that the average good and service goes up by about 2% every year. So if maintenance fees go up by 2% next year, but your income also goes up by 2%, theres really no effect to you. However, if maintnenace fees go up by 3%, its now eating a larger portion of your disposable income. But not not 3% more. Only 1% more.

So in order to make your projections meaningful, you have to "discount" the future year's cash flows (difference between rack rate and maintenance fees) into "todays" dollars.

The formula to do this is:

C/(1 + r)^n

C = periods cash flow
R = inflation rate (2% is conventional to use)
N = period number after start period. So if its 2019 today, in 2021 use 2. 2019 = 0, 2020 = 1, 2021 = 2, etc....

If you do this in excel, the formula is =PV(0.02,N,0,-C,0).

Sorry its hard to explain in a post. But it is important for the calculations to actually make sense

 

[CanadaDisney05]

Curious on if you tried to handle any of the currency exchange numbers in your values? Been doing similar math for our recent foray into DVC but have not figured out the best way to factor in our CAD:USD rates.

So far I'm just taking comfort in the increased resale/rental value if the CAD tanks.

I did not factor in CAD/USD exchange into my equation because there is simply no reliable assumption. US/CDN inflation has long historical evidence for hovering near 2%. Maintenance fee's have a smaller track record, but still enough of a record to draw some general conclusions that it should be somewhere in the 3 to 5% range long term. Long term investments in diversified index funds have long term evidence suggesting you should see returns in the 6 - 9% range depending on risk tolerance.

USD/CAD exchange rate doesn't trend over the long term. It just fluctuates. Therefore, there is no assumption that would make logical sense. So instead of factoring it into the equation, I simply noted it as a risk.

If value of CAD goes down, then tickets, food, etc... get more expensive. But at the same time, like you mentioned, the value of my deed goes up and counters the effect to some degree.

If the value of CAD goes up, the opposite is true. Tickets, food, etc... become cheaper, but the value of my deed goes down.

 

[Momtomouselover]

There is a concept in Finance called Time Value of Money. Basically, it means that a dollar today buys more than a dollar tomorrow. This is because as time go's by, costs of goods and services generally go up. For example, a chocolate bar used to cost 5 cents. Now, can you even get one for a dollar? Chocolate bars don't all of a sudden eat up 20x more of your budget. Its because the avg income has gone up by 20x as well.

The same concept works for DVC. Average US inflation is about 2% per year. This means that the average good and service goes up by about 2% every year. So if maintenance fees go up by 2% next year, but your income also goes up by 2%, theres really no effect to you. However, if maintnenace fees go up by 3%, its now eating a larger portion of your disposable income. But not not 3% more. Only 1% more.

So in order to make your projections meaningful, you have to "discount" the future year's cash flows (difference between rack rate and maintenance fees) into "todays" dollars.

The formula to do this is:

C/(1 + r)^n

C = periods cash flow
R = inflation rate (2% is conventional to use)
N = period number after start period. So if its 2019 today, in 2021 use 2. 2019 = 0, 2020 = 1, 2021 = 2, etc....

If you do this in excel, the formula is =PV(0.02,N,0,-C,0).

Sorry its hard to explain in a post. But it is important for the calculations to actually make sense

You have helped me "see" so much better!! Where I knew that the concept existed it was hard to actually calculate for it or see it until you shared that formula.

 

[CanadaDisney05]

You have helped me "see" so much better!! Where I knew that the concept existed it was hard to actually calculate for it or see it until you shared that formula. Generally, with large purchases, I would ask an accountant or my husband is great with finance. He is not a Disney fan so has left the choice up to me here and I don't want to bother or pay an advisor while I do these calculations.

You are right. It's one of those things that most people understand the concept, but don't understand how to apply it to these types of decision making models. FWIW, I work in Finance, so the idea is drilled into my brain.

 

[Momtomouselover]

You are right. It's one of those things that most people understand the concept, but don't understand how to apply it to these types of decision making models. FWIW, I work in Finance, so the idea is drilled into my brain.

I started to write this in my post above then deleted but...my husband is good in finance but he is not a Disney fan but said the choice is up to me. I want to make sure it is a good fit (or isn't) before telling him my choice. We also have an accountant or financial advisor but no way did I want to bring this to them. First, I would have to explain my whys and how I'm crazy and go to Disney a lot (although the accountant has noticed ) but then I have lots of calculations and would rather do them myself. 10 years ago I know DVC would have been a good choice for us but I never looked into it and was somewhat in denial about how much I spend there. Now, I realize it but I wonder if my habits will be the same for the next 10, 20, 30 years. I think I'm nuts!! jk

 

[Sandisw]

I started to write this in my post above then deleted but...my husband is good in finance but he is not a Disney fan but said the choice is up to me. I want to make sure it is a good fit (or isn't) before telling him my choice. We also have an accountant or financial advisor but no way did I want to bring this to them. First, I would have to explain my whys and how I'm crazy and go to Disney a lot (although the accountant has noticed ) but then I have lots of calculations and would rather do them myself. 10 years ago I know DVC would have been a good choice for us but I never looked into it and was somewhat in denial about how much I spend there. Now, I realize it but I wonder if my habits will be the same for the next 10, 20, 30 years. I think I'm nuts!! jk

When we bought 10 years ago, I didn’t do this in-depth of a calculation, but what I did do is look at what my yearly room costs were for our Disney trip for my family of 5.

i then looked at what it would cost me to own DVC, including yearly MFs at the time..even considered financing...and compared to what it was costing me for my 5 night trip. If it was less, the I knew it was a good deal. I planned to visit Disney often even after becoming empty nesters,

What I realized then is that in 5 years, eve if I had to sell what I was buying at the time for half of what I paid, I’d still come out ahead financially and we would have been staying in 1 bedrooms vs. just deluxe rooms,

Granted, I didn’t take into account all of what is being discussed as I had a yearly vacation budget..which I still do..,and if it covered DVC plus our other yearly vacations costs, it made sense!

Fast forward to today, and of course, I kept adding on, am now retired, and plan to go probably 8 times a year.

MFs alone eat up the vacation budget..lol...but I’m happy that I can go without having to worry. The buy in cost is long gone, but what I got in return between my own trips and those of my family and friends is priceless!