Setting and working towards financial goals is an important part of financial planning. Whether saving up for higher education, buying a house, retirement, or any other major milestone, knowing how much money you will need in the future is the first step. This is where a future value calculator comes in convenient. It helps you estimate the future value of your financial goals based on assumed rates of return and inflation.
Read on to understand what financial goal planning is, how future value calculators work, and how you can utilise them effectively.
Table of Contents
Financial goal planning refers to setting and developing strategies to achieve financial targets. Your financial goals can be short-term, medium-term, or long-term. Short-term goals are achievable within 1-3 years. Examples include building an emergency fund or saving up for a vacation. Medium-term financial goals take 3-7 years to accomplish. These could be buying a car or paying for a wedding.
Long-term financial goals usually take 10-15 years to realise. These include retirement planning, buying a home, or saving up for your child’s higher education. Consider the time horizon and risk tolerance when investing for any financial goal.
Primary financial goals like funding a child’s education or wedding, buying real estate, etc., need high-value investments. You must strategically invest your money over many years to actualise such ambitions. Financial goal planning assists you in deciding where to allocate your money. You can choose suitable investments based on your risk appetite to stay on track.
Proper financial goal planning brings more structure to money management. For instance, to save up for your child’s college fees, you may have to cut down on unnecessary expenditures. Planning early and budgeting helps you accumulate funds without straining finances.
A future value calculator is a simulation tool that estimates the future worth of a financial goal. It utilises the concept of future value in its work. This calculator has input fields for the goal’s current value, time horizon, and assumed inflation rate. Based on these inputs, it forecasts the goal’s future worth.
Some future value calculators also show the periodic investment needed to reach that goal. For this, details of expected returns and any current savings must be provided.
A future value calculator leverages the future value formula to make it work.
The formula is:
FV = PV (1+r)^n
Where,
FV = Future Value
PV = Present Value
r = Assumed annual rate of return
n = Duration in years
For example, say the current expense for a desired vacation abroad is ₹10 lakhs. You want to assess the cost after 10 years, assuming an annual inflation of 5%. The future value calculator will make the following calculation:
PV = ₹10,00,000
r = 5%
n = 10 years
Plugging this into the formula:
FV = 10,00,000 (1+0.05)^10 = ₹16,10,510
So the estimated trip expense after 10 years, considering 5% annual inflation, is ₹16.1 lakhs.
Some calculators can also tell you how much money you need to save regularly to reach a specific amount in the future. For example, if you want to start saving for a trip and can earn an 8% annual return on your savings. The calculator will use the PMT (Payment) formula to calculate the monthly savings needed.
PMT = ₹12,053
So you need to save ₹12,053 monthly to accumulate ₹16.1 lakhs over 10 years at an 8% annual return.
Follow these tips to estimate your financial goals with a future value calculator accurately:
Create a list of short, medium, and long-term financial goals. This is crucial to determining the time horizon and monthly savings needed. Prioritise goals according to importance and budget.
The research presents costs and expenses associated with each goal, such as tuition fees for the desired college course, current prices in the location where you wish to buy a home, and the estimated retirement corpus needed.
Make reasonable inflation assumptions based on historical data. Education, healthcare, and housing expenses tend to rise faster than average inflation. For long-term goals, generally forecast 5-7% annual inflation.
Select a suitable expected rate of return. Use pre-tax returns as taxes will reduce actual earnings. For equity returns, deduct 2-3% to account for taxes and fees.
Use conservative estimates and assumptions. Lower inflation and returns will mean you need to save more to achieve targets, reducing the risk of falling short.
If you have already saved something toward the goal, input that amount, too. This will provide a more accurate picture of the remaining shortfall.
Reevaluate your goals, timelines, estimates, and savings every year. Adjust variables if needed based on the latest developments. Revise your investment strategy if necessary.
There are many advantages to using an online future value calculator for financial goal planning:
The future value calculated tells you exactly how much money you need to fund each goal. This helps immensely in planning finances.
The calculator shows how much you need to save each month to achieve a calculated corpus, which can help you better channel investments.
By including rising prices in calculations, the tool provides a realistic estimate of each goal’s future cost.
Shows how varying rates of return impact savings needed. Applicable to select the right investment products.
Future value calculators and compound interest calculators are free, simple to use, and generate results in seconds! They are convenient for quick financial planning.
A future value calculator is a valuable tool for estimating what future goals will cost and how much you need to set aside regularly to afford them down the road. Planning for your financial goals leads to making intentional money decisions today to fund what matters most tomorrow.
Also Read: How To Improve Long-term Financial Results With Budgeting
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