ET Mutual Funds Explained: Want to know the future value of your financial goals? Use this formula

Mutual funds and advisors actively promote goal-based investing and urge investors to understand the importance of financial goals and how to achieve them through investing. However, many investors struggle to calculate the future value of their goals. Instead of making an accurate calculation, they often choose arbitrarily large amounts like 50 lakh or 1 crore rupees thinking that these amounts will be enough. What seems like a large number today may lose its value in the future due to inflation, so accurate calculations taking inflation into account are essential when planning financial goals. Many investors simply choose any number. Many investors choose large amounts, usually 50 lakh or 1 crore rupees, which they think will be enough for their future. Inflation significantly reduces the purchasing power of money over time, so an amount that seems substantial now may not be enough in the years to come. The value of an investment does not always remain the same. It decreases or increases due to the interest rate or inflation/deflation which increase/decrease the value of money. The effects of annual inflation significantly reduce the purchasing power of money with each passing year.

Investors need to consider the impact of inflation on their future financial goals. To do this, they must first calculate how much a particular goal costs today. For example, if a child’s college education costs Rs 500,000 today, the investor needs to determine how much time is left before he has to pay for the education. If the child is expected to go to college in 15 years, he needs to calculate how much the same education will cost in 15 years, taking inflation into account. This is called calculating the future value of the goal.

Calculating the future value of a goal requires a bit of math. For those who aren’t so good with numbers, there is a simple formula that simplifies the process. The formula for future value (FV) is:

Future Value (FV) = Present Value (PV) x (1 + r/100)^n

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In this formula:

FV = Future value of your target

PV = Present value or current cost of your goal

r = Annual inflation rate

n = Time remaining to reach your goal (in years)

If we apply this formula in the given example and the annual inflation rate in education is 10%, the cost of education which is Rs 10 lakh today will be Rs 44,53,920 after 15 years. It is important to use a realistic inflation rate because different objectives may have different inflation rates. For example, inflation in education may be different from inflation in healthcare and it is important to use the right rate for each specific objective.
For those who prefer to use Excel, this calculation can also be done using the FV function in Excel’s “Insert Function” under the “Formulas” tab. By entering the appropriate values, the future cost of a particular goal such as a child’s education after 15 years can be calculated effortlessly. For example, in the present case, the “Pmt” value is entered as “0” since there are no regular payments or costs and only a one-time expense is calculated. Understanding and calculating the future value of financial goals is essential for effective financial planning. Instead of relying on random large numbers, using accurate calculations that take inflation into account can ensure that the financial goals set today will actually meet future needs. Although it may seem complicated at first, using these straightforward formulas or Excel functions can simplify the process and help investors make informed decisions and confidently achieve their financial goals.

If you are using Excel, you can use the Insert Function feature under the Formulas tab and select the FV function. Now enter the required values ​​to calculate the cost of the child’s education after 15 years. We need to enter the PMT value as 0 because there are no regular payments or expenses. We are calculating the one-time expenses.