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

economictimes.indiatimes.com:

financial goals and investing to achieve them. However, many investors struggle with calculating the future value of their goals. Instead of employing a precise calculation, they often choose arbitrary large figures like Rs 50 lakh or Rs 1 crore, assuming these amounts will suffice. What seems like a big number today may not hold its value in the future due to inflation, making precise calculations using inflation vital in planning for financial goals.

Many investors just pick a random number. Many investors pick up big numbers, usually Rs 50 lakh or Rs 1 crore which they think will suffice for their future. Inflation significantly reduces the purchasing power of money over time, so the amount that appears substantial now might not be enough in the coming years. The value of any investment does not remain the same always. It either decreases or increases due to interest rate, inflation/deflation which increases/ decreases the value of money. The impact of annual inflation erodes the purchasing power of money significantly with each passing year.

Investors need to account for the effects of inflation on their future financial goals. To do this, they first need to calculate how much a particular goal costs today. For instance, if a child’s higher education costs Rs 5 lakh today, the investor needs to determine how much time is left until they need to pay for the education. If the child is expected to go to college in 15 years, they need to calculate how much that same education will cost in 15 years, taking inflation into account. This is known as calculating the future value of the goal.

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