Sample Financial plan #3 – create financial goal time line

In the last post we saw how Ravi and Madhuri have worked out the more important goals of their lives in terms of significant events. The next step is to create a financial goal time line. In simple terms it means we need to understand each goal in terms of it’s year of execution and the amount of money required to fulfill it at the time.

I will go through each of the goals and explain the process for the first couple of them. However, as I do not believe in reinventing the wheel, I will not get into mathematical details of how these are derived. For those, who are interested, all you really need to understand is the compound interest formula and it’s variants. I have taken inflation for all goals to be at 6 % except the education goals which are at 10 %. This is borne out by the current trends that we see.

Relocating to Kerala:

  • Apartment / house current value is 40 lacs. Time to goal is 20 years, inflation is at 6 %.
    • Inflation factor at 6 % after 20 years = 3.2071
    • Future value of goal in 2035 = 40 lacs x 3.2071 = 1.28 crores
  • Seed capital for business at current value is 10 lacs. Time to goal is 20 years, inflation is at
    • Inflation factor at 6 % after 20 years = 3.2071
    • Future value of goal in 2035 = 10 lacs x 3.2071 = 32 lacs.
  • Financial independence current value is 1.5 crores. Time to goal is 20 years, inflation is at 6 %
    • Inflation factor at 6 % after 20 years = 3.2071
    • Future value of goal in 2035 = 1.5 crores x 3.2071 = 4.81 crores

Education of children:

  • Graduation and post graduation for Ankit is assumed to be BE and MBA.
  • Current costs for 4 year BE is 15 lacs, time to goal is 14 years and inflation is at 10 %
    • Inflation factor at 10 % after 14 years = 3.7975
    • Future value of goal in 2029 = 15 lacs x 3.7975 = 57 lacs
  • Current costs of 2 year MBA from an IIM is 20 lacs. Time to goal is 16 years, inflation is at 10 %.
    • Inflation factor at 10 % after 16 years = 4.5950
    • Future value of goal in 2033 = 20 lacs x 4.5950 = 92 lacs
  • Graduation and post graduation for Naina is assumed to be BA and MA.
  • Current costs for 3 year BA is 8 lacs, time to goal is 17 years and inflation is at 10 %
    • Inflation factor at 10 % after 17 years = 5.0545
    • Future value of goal in 2032 = 8 lacs x 5.0545 = 40 lacs
  • Current costs of 2 year MA from is 6 lacs. Time to goal is 20 years, inflation is at 10 %.
    • Inflation factor at 10 % after 20 years = 6.7275
    • Future value of goal in 2035 = 6 lacs x 6.7275 = 40 lacs

Vacations outside India:

  • Current cost of a family vacation for a week outside India is 6 lacs.
  • Vacation years are 2021, 2025, 2029 and 2033.
  • Inflation is taken at 6 %.
  • Projected costs of the vacations in the different years are as follows :-
    • Cost in 2021 = 6 lacs x 1.4185 = 8.5 lacs
    • Cost in 2025 = 6 lacs x 1.7908 = 10.75 lacs
    • Cost in 2029 = 6 lacs x 2.2609 = 13.5 lacs
    • Cost in 2033 = 6 lacs x 2.8543 = 17 lacs

Purchase of cars:

  • Ravi wants to buy a car which costs 10 lacs today, in 3 years with inflation at 6 %
    • Future value of goal in 2017 = 10 lacs x 1.1910 = 11.91 lacs
  • Madhuri wants to buy a car which costs 7 lacs today, in 5 years with inflation at 6 %
    • Future value of goal in 2020 = 7 lacs x 1.3382 = 9.37 lacs

Marriage of children:

  • Ankit’s marriage is estimated at 15 lacs and Naina’s at 30 lacs of current costs.
  • Both are 25 years away and inflation is taken at 6 %.
  • Future value of both goals = 45 lacs x 4.2919 = 1.93 crores

Having got all the monetary values associated with the significant events of their lives, Ravi and Madhuri can now look at making a financial plan to meet these goals. In the next post we will see how the totality of the need is measured against current available assets and future assets that are to be created.

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