Saving is easier when you know how much you'll need. Here's how to estimate
Posted by: Arti Bhargava on Dec 17, 2018, 06.30 AM IST
A new mother, Vidhi wants to start investing in mutual funds for her child’s higher education. She has been told that over a long period her investment would grow into a sizeable amount with the power of compounding. So she intends to invest over the next 15 years. However, she does not know how to calculate the amount she would need at the end of this period. She wants to learn how to arrive at the figure.
To start with, Vidhi has to make an estimate of the amount of money she would need for her child’s education. This can be done by looking at what higher education costs today and then calculating what the cost would be 15 years from now. For this, she will need to figure out the rate of inflation that may apply to educational expenses. Given a positive rate of inflation, she will need a higher amount 15 years from date. If the education she plans for her child costs Rs 5 lakh today, she can assume an inflation rate of 7%.
Vidhi can easily do her computations using MS Excel. All she needs to do is open up a worksheet inside the application, and key in her numbers in the cells. She should click on ‘fx’ from the status bar at the top of the sheet and choose ‘financial’ as the category. In the list that appears, she can scroll, to arrive at FV or the future value. Clicking on it will open a dialogue box. ‘Nper’ is the number of periods (15), ‘Rate’ is the inflation rate (7%), ‘PMT’ is to be skipped, and PV is the current cost of higher education (Rs 5 lakh). The resulting amount would be Rs 13,79,515. This would be the amount she will need at the end of the 15 year period, based on the above assumptions.
MS Excel can be used to make such estimates of goals and give them a definite number. In the example above, we have not used ‘PMT’ as this will apply if the amount is not a lump sum, but required periodically. The PV is the present value which is the current cost of education. FV is the future value that is being estimated over a 15-year period, assuming a 7% increase in the PV. Vidhi can juggle the numbers to see how her requirement can vary depending on her assumptions— cost of education number of years and rate of inflation. Saving for a goal is easier when it is estimated in advance.
(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)