The formula for this is a variation of the compound interest formula:

Principal = Amount / [{1 + ( Rate / 100 ) } ^ Years ]

For us,

Principal = Lump-sum amount to be invested now
Amount = Cost of achieving the goal at the target time
Rate = Assumed rate of return
Years = Years till the achievement of the goals

For our goals, we arrive at the following figures:

Shocked by the amount needed to be invested now, for the goal of buying an apartment? But it is true - and this is the power of compounding. Since you are making a very long term investment, compounding would do most of the hard-work for you!

Also note that the "Amount needed now" is less than the cost of the goals today, because the assumed rate of return is higher than the assumed inflation rate. Since for goal 1, the difference is very high, the amount needed now is significantly lower than the cost of the goal today. For goal 2, the difference is less, and so the amount needed now is only slightly lower than the cost of the goal today.

The "Amount Needed Now" figure gives you the lump-sum amount that you can invest now to save enough for your goals. This would be possible if you have a one-time surplus - like a yearly bonus. If you have such a surplus, go ahead and invest it - and you won't need to invest every year or every month for the goal. But please be careful - I would suggest that even if you do have the amount needed, if you are investing in the stock market, make staggered investments so that you can benefit from cost averaging.

But most people would not have such a large amount at their disposal, and for them, the best way is to invest periodically. So, lets go ahead and find out how much you need to invest every year for each goal.

For doing this, we would use the concept of an Annuity, and we would do it using a function called FV (Future Value) in MS Excel. It looks something like this:

Click here to download the worksheet for this example.

The FV formula gives the future value of a periodic investment, if we know the rate of return, the periodic investment, and number of periods (years).

Here is a little twist - we already know the answer for this formula, and that is the cost of achieving the goal at target time. What we don't know is the "periodic investment", which we need to find out.

So, in MS Excel, insert this formula, and adjust the value of the cell "periodic investment" such that the result of the formula is equal to the cost of achieving the goal at target time. This is the yearly investment needed to earn enough to achieve your goal in time! For simplicity, just divide this amount by 12 to get the monthly amount.

Step 7: Start Investing

Now that you know exactly how much you need to save each month for each of your goals, what are you waiting for? Go ahead and start investing!!

You can make the monthly investment needed through a mutual fund Systematic Investment Plan (SIP). If you have multiple goals, as you would in real life, you may combine the monthly investment needed for 2-3 goals and invest them together in a good MF SIP.

Happy investing!

Illustration:

Here is a table indicating the yearly and monthly savings needed if the goal of buying the house is 5, 10, 15, 20, 25 and 30 years away. Again, we assume the rate of inflation to be 5%.

If the goal is 30 years away, you need to set aside a very modest sum of Rs. 16,393 per year. But if the goal is 10 years away, you have to set aside a hefty sum of Rs. 2,07,756 every year.

This example illustrates that the earlier you start saving, the better is the effect of compounding, and therefore, the lesser is the money that you need to invest. Time has a disproportionate positive effect on your returns.

Note:

The calculations that you would do depend on two very important assumptions:

Please note that both these need to be assumed as accurately as possible, as even a little change in these can vastly impact the amount needed to be invested every month, especially for long term goals.

Other articles you might be interested in:

• Direct investment in Stocks versus Mutual Funds (MFs)?
• Are ULIPs a costly form of term insurance plus MF investments?
• ULIP v/s Endowment Plan for Life Insurance
• National Savings Certificate (NSC)