Although we have discussed how to plan for the future in this video you can use the calculations and ideas to solve a variety of financial problems. Important thing to remember is the power of compounding and therefore timely action!From our knowledge of our monthly requirement of money in the future and an interest rate we can calculate backwards and create a plan of action for today. You will realize that securing your financial future and enjoying a dignified retired life is not that difficult.
The solution discusses the following query by Harry:
Suppose I’m 30 years old. I’ll be able to save for the next 20 years, until I’m 50. Between 50 and 60 I will not be able to save because my expenses will be high owing to the college education of my children, my daughter’s marriage, etc. I wish to guarantee myself 10000 per month starting one month after my 60th birthday. How much do I need to save every month for the next 20 years, starting at the end of next month. I’m assuming that my investments will yield 8.5% annually and based on my family history I’m likely to live till 80.
Watch the video below to learn how to plan your finances with the help of MS Excel:
Since we know Harry’s consumption of money in the fuutre, we can calculate backwards.
First we calculate the ‘present value’ of the money he will need to have in his account at the age of 60 (PV60) based on his requirement of 10000 units of money from 60 years onwards till the age of 80.
Then we go further backwards to the age of 50. Now the present value of the money at the age of 50 will become substantially less due to ‘discounting’ at the rate of 8.5%.
At this point we can use the PVat 50 to calculate the ‘PMT’ at 30. Now Harry realizes that it is not at all difficult to save about 788 units of money per month to enjoy 10000 units at the age of 60!
You can use such calculations for other things like saving for your own health insurance.
Using Solver for financial planning