Mutual fund houses and advisors are busy promoting goal-based investing. Many investors seem to have understood the importance of having a goal and investing to achieve it. However, most investors fumble when it comes to calculating the value of their future goals.
Here is the scoop: big figures may not be enough to take care of your future goals. You should know an important factor while planning for your financial goals. What seems a big number today may not remain big in the coming years. With the impact of annual inflation, the purchasing power of the same amount would corrode significantly with every passing year.
That is why it is wise to do a bit of maths while planning for your financial goals. Numerically challenged? Don’t worry. We will make it easy for you.
To begin with, find out how much the goal costs today. For example, take your child’s higher education. Let us assume that it costs Rs 5 lakh today. Next, find out how much time is left for your child to get an admission to the course. Or, in other words, when will you need the money for your child’s education.
Let’s assume again that he would go to college in 15 years. Now, you need to find out how much will the course cost (which costs Rs 5 lakh today) after 15 years. That means you have to find out how inflation has impacted the course fee - or how it got inflated, in other words -- in 15 years. This is called calculating the future value of your goal.
There are several ways to calculate the future value of your goal. You may either sit with a pen and paper and a calculator or use an excel sheet.
If you are not familiar with excel, you may write the following formula on a paper and calculate.
where;
FV= Future value of your goal
PV= Present value or current cost of your goal
r= annual rate of inflation
n= time left to reach your goals (in years)
Putting the values of the above example in formula, assuming education inflation is 9 per cent, the same education course will cost Rs 18,21,240 after 15 years.
While calculating the future value of your goal, it is very important to take a realistic inflation number. There is no standard inflation figure. It may be different for different goals. For example, educational inflation will not be the same as medical inflation.
Next, if you are an excel user, you may use the ‘Insert Function’ feature under the
Formulas
tab and choose
FV function
. Now, as shown below, start entering the values to calculate the cost of child education after 15 years. We have inserted Pmt as ‘0’ as there are no periodical payments or costs. We are calculating for one-time expense.
