In our previous blog, we have seen how and why we should invest money Mindfully and what are the benefits of it. consequently, in this blog, let’s calculate and plan an investment for a financial goal practically.
Link: https://moneymaestro.in/invest-money-mindfully-benefits-of-investing-as-per-financial-goals/
Don’t worry, I am not going to teach you any complicated formulas. After all, the purpose of this blog is to make you understand the steps involved in the process of goal planning. Even a non-finance person can understand this blog easily.
Step No.1:
Decide a Financial Goal: To purchase a Car.
Pro Tip: To make it more realistic, decide the model and color of the car. Then take your picture with it and store it. This will enhance the chance of making it happen.
Step No.2
Decide a Time-frame: After 5 years
Why time frame in goal planning is important?
Link: https://moneymaestro.in/invest-money-mindfully-benefits-of-investing-as-per-financial-goals/
Step No.3
Know Your Risk Tolerance Level:
There are 5 categories of Risk Profiles.
- Low
- Moderately Low
- Moderate
- Moderately High
- High
- Very High
Source: SEBI
There are numerous questionnaires available to help you determine your risk-taking capacity.
What purpose does know your risk tolerance have in goal setting?
You must match your investment goal and time span with the risk level. As a result, you can select the appropriate investment.
Every financial instrument has its own set of advantages and disadvantages, as well as appropriate time spans and risk levels. Most crucially, the likelihood of generating rewards.
- The larger the risk, the greater the likelihood of higher profits.
Possible Returns & Time-Frames according to different Risk Profiles:
| Risk | Possible Returns p.a. (%) | Suitable Time-Frame |
| Low Risk | 5%-7% | Up to 1-2 Years |
| Moderately Low Risk | 7%-8% | Up to 2-3 Years |
| Moderate Risk | 8%-10% | Up to 3-5 Years |
| Moderately High Risk | 10%-12% | Above 5-7 Years |
| High Risk | 12%-14% | Above 7 Years |
| Very High Risk | Above 14% | Above 7 Years |
Note: It is not guaranteed, it is as per the general historical data on an average basis. Other factors such as your investment time, economic conditions, and asset allocation also matter.
Coming back to step no.3, for example, you have discovered you want to take a “Moderate” risk for the goal of a Car Purchase. And as your goal is 5 years away from now, you can take moderate risk for that.
Step No.4
Discover the amount required of goal in future
In today’s terms, you’re aware of the required value of a goal. However, the entire amount will automatically increase in the future as a result of the effect of the “Inflation Component.” Inflation is defined as a general increase in prices and a decrease in the purchasing power of money.
To win this race and keep up with the time, you must consider the Inflation Factor.
Don’t be concerned! I’ve made things easy for you. Simply look at the table below to determine the appropriate amount for each goal, i.e. Future Value of the Financial Goal.
As promised, there is no difficult formula in this blog.
Future Value (FV) Table:
| Inflation Rate | ||||
| Year | 5% | 6% | 7% | 8% |
| 1 | 1.05 | 1.06 | 1.07 | 1.08 |
| 2 | 1.10 | 1.12 | 1.14 | 1.17 |
| 3 | 1.16 | 1.19 | 1.23 | 1.26 |
| 4 | 1.22 | 1.26 | 1.31 | 1.36 |
| 5 | 1.28 | 1.34 | 1.40 | 1.47 |
| 6 | 1.34 | 1.42 | 1.50 | 1.59 |
| 7 | 1.41 | 1.50 | 1.61 | 1.71 |
| 8 | 1.48 | 1.59 | 1.72 | 1.85 |
| 9 | 1.55 | 1.69 | 1.84 | 2.00 |
| 10 | 1.63 | 1.79 | 1.97 | 2.16 |
| 11 | 1.71 | 1.90 | 2.10 | 2.33 |
| 12 | 1.80 | 2.01 | 2.25 | 2.52 |
| 13 | 1.89 | 2.13 | 2.41 | 2.72 |
| 14 | 1.98 | 2.26 | 2.58 | 2.94 |
| 15 | 2.08 | 2.40 | 2.76 | 3.17 |
| 16 | 2.18 | 2.54 | 2.95 | 3.43 |
| 17 | 2.29 | 2.69 | 3.16 | 3.70 |
| 18 | 2.41 | 2.85 | 3.38 | 4.00 |
| 19 | 2.53 | 3.03 | 3.62 | 4.32 |
| 20 | 2.65 | 3.21 | 3.87 | 4.66 |
Note: You just to multiply the you goal amount (today’s value) with Multiplier Factor. ‘Multiplier Factor’ is a combination if inflation rate & no. of years.
You intend to purchase a car after 5 years. According to you, it would cost Rs. 8.00 Lacs to today’s terms.
| Goal: Car Purchase | |
| Present Value | Rs. 8,00,000/- |
| Period | 5 Years |
| Inflation Rate Assumed | 6% |
| Multiplier Factor (refer above table) | 1.34 |
| Future Value (Present Value * 1.34) | Rs. 10,72,000/- |
Till now, you must have found out the corpus required in the future to achieve the particular goal.
Step No.5
Discover the monthly investment amount required to achieve a goal
In this step, you need to calculate the investment required to accumulate the future value.
IMPORTANT: The below mentioned calculations assume that is Future Value is Rs. 1,000/-. You need to divide the amount by Rs. 1,000/- to arrive at right amount.
Investment Required (Monthly Mode):
| Rate of Return on Investment | |||||||
| Year | 6% | 7% | 8% | 9% | 10% | 12% | 14% |
| 1 | 81.066 | 80.693 | 80.322 | 79.951 | 79.583 | 78.849 | 78.120 |
| 2 | 39.321 | 38.939 | 38.561 | 38.185 | 37.812 | 37.073 | 36.346 |
| 3 | 25.422 | 25.044 | 24.670 | 24.300 | 23.934 | 23.214 | 22.511 |
| 4 | 18.485 | 18.113 | 17.746 | 17.385 | 17.029 | 16.334 | 15.660 |
| 5 | 14.333 | 13.968 | 13.610 | 13.258 | 12.914 | 12.244 | 11.602 |
| 6 | 11.573 | 11.216 | 10.867 | 10.526 | 10.193 | 9.550 | 8.939 |
| 7 | 9.609 | 9.259 | 8.920 | 8.589 | 8.268 | 7.653 | 7.073 |
| 8 | 8.141 | 7.800 | 7.470 | 7.150 | 6.841 | 6.253 | 5.705 |
| 9 | 7.006 | 6.673 | 6.352 | 6.043 | 5.745 | 5.184 | 4.667 |
| 10 | 6.102 | 5.778 | 5.466 | 5.168 | 4.882 | 4.347 | 3.860 |
| 11 | 5.367 | 5.051 | 4.749 | 4.461 | 4.187 | 3.678 | 3.220 |
| 12 | 4.759 | 4.450 | 4.158 | 3.880 | 3.617 | 3.134 | 2.705 |
| 13 | 4.247 | 3.947 | 3.664 | 3.397 | 3.145 | 2.687 | 2.284 |
| 14 | 3.812 | 3.521 | 3.247 | 2.989 | 2.749 | 2.314 | 1.938 |
| 15 | 3.439 | 3.155 | 2.890 | 2.643 | 2.413 | 2.002 | 1.651 |
| 16 | 3.114 | 2.839 | 2.583 | 2.345 | 2.126 | 1.737 | 1.410 |
| 17 | 2.831 | 2.563 | 2.316 | 2.088 | 1.879 | 1.512 | 1.208 |
| 18 | 2.582 | 2.322 | 2.083 | 1.864 | 1.665 | 1.320 | 1.037 |
| 19 | 2.361 | 2.109 | 1.878 | 1.669 | 1.479 | 1.154 | 0.892 |
| 20 | 2.164 | 1.920 | 1.698 | 1.497 | 1.317 | 1.011 | 0.769 |
Let’s continue our example:
| Goal: Car Purchase | |
| Present Value | Rs. 8,00,000/- |
| Period | 5 Years |
| Inflation Rate Assumed | 6% |
| Multiplier Factor | 1.34 |
| Future Value (Present Value: Rs. 8,00,000/- * 1.34) | Rs. 10,72,000/- |
| Interest on investment assumed | 9% |
| Multiplier Factor (for investment) Refer above table) | 13.258 |
| Investment required per month {(Rs. 10,72,000*13.258)}/1000 | Rs. 14,213/- |
Monthly Investment Amount = Future Value * Multiplier Factor / 1000
With these 5 steps, you can get a rough idea that you can purchase a car in 5 years if you invest Rs. 14,213/- per month in a financial product that offers 9.0% p.a.
Note: Returns on investment are never guaranteed and all figures mentioned in the blog are based on assumptions about the inflation rate & investment rate.
Now, the most important decision to make is whether you are able to invest the said amount or not.
If yes, then congratulations!
If not, don’t be disheartened. You can start investing as much as you can. If there is any shortfall, you can consider opting for Bank Finance (if this goal is mandatory) or you can invest your lump-sum income such as a bonus or incentive to fund the goal.
Don’t forget to review your investments at least twice a year.
Happy Investing but most important start investing!
Summary of steps:
Very neatly written and very convincingly explained. Very nice.
Nicely explained and easily and convincingly told how can we achieve our target if we start investing