We all understand how important it is to save and invest money today in order to achieve our goals in the future. Without a specific goal, we are walking on an infinite platform where we do not know how much amount we would be requiring in the future. I have read in newspapers people quoting random big numbers (50 lakh and 1 crore) to meet their future needs. But is this 1 crore enough 20 years down the line? What seems a big number today may not be tomorrow as inflation will erode its value as time passes by. But if we have a specific goal, such as kids education, buying a house or even retirement, it becomes easy to identify a ballpark figure that we need to save and invest today so that we can attain our goal with minimum fuss in future.
For me and my husband, one of our primary goals is to save for our daughter's higher education. Lets assume we need to know how much the fee would be after 20 years. To know this we require the following information:
Now lets start entering values as given in the image below: Rate as 9%, Nper (time) as 20, no need to put anything under pmt, and put 15 lakh under PV (I have put negative sign as it is cash outflow), we can see that after 20 years the same education will cost around 84 lakh. Do not be surprised by this number. In 2009, the fee of an MBA program at IIM's was around 4-5 lakh and at the moment it is hovering around Rs 20 lakh.
Risk Averse people who will primarily invest in FD's, PPF, debt instruments etc, and the average rate of return would be 8%.
- I believe the present average fee of a good B school in our country is around 15 lakh
- The child's age - My daughter is 2.5 years at the moment
- No of years left to go to college. Lets assume 20 years
- Education inflation rate every year - Lets take a modest 9%
Now lets start entering values as given in the image below: Rate as 9%, Nper (time) as 20, no need to put anything under pmt, and put 15 lakh under PV (I have put negative sign as it is cash outflow), we can see that after 20 years the same education will cost around 84 lakh. Do not be surprised by this number. In 2009, the fee of an MBA program at IIM's was around 4-5 lakh and at the moment it is hovering around Rs 20 lakh.
How to Ascertain the Present Value
So now I know the figure in the future, the next question that pops in my mind is how much I need to save every year to achieve Rs 84 lakh after 20 years. I shall explain this by taking 2 possible scenarios and using PMT functionality instead of FV as below:Risk Averse people who will primarily invest in FD's, PPF, debt instruments etc, and the average rate of return would be 8%.
As you can see from above image, a person would have to invest Rs 1.83 lakh each year for 20 years to attain Rs 84 lakh.
Risk Seeker people who primarily invests in Mutual Funds or Equity and the average rate of return is 12%.
The yearly amount to be invested every year has reduced to Rs 1.16 lakh. However, my advice is to shift to debt instruments 3-4 years prior to goal year to reduce the risk of equity volatility.
Conclusion
To conclude, we all have our desires but we need to channelize our resources in a planned way to fulfill them. I would recommend to start finalizing your future goals so that you can direct your savings accordingly. See what nature of investor you are to get an idea of the quantum of the saving required every year. Another important thing is to take a realistic inflation number as it may be different for different goals (education inflation may be different to real-estate inflation). Lastly, the earlier you start saving the lesser you will have to invest as you can reap the benefits of compounding.
