How to put a monetary value on your goals

How to put a monetary value on your goals

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“There seems to be some perverse human characteristic that likes to make easy things difficult.” said Warren Buffett and the hundreds of mushrooming financial websites out there are working hard to prove him correct.

Quantifying Goals has been made out to be some complex and esoteric task. 

First, there is a calculator for each different goal; I mean there is one for buying a home, another for son’s education, a separate one for daughter’s college and of course one for the Indian favourite, a daughter’s marriage.
Second, no effort is spared to convince you that, quantifying a goal is something very technical because we have to “forecast” inflation (there is a different rate suggested for each of your goals), our “life span” in order to “compute” (its never simply calculated!) future value, etc., etc.
Thirdly, you desperately need help from an “expert” to figure it all out – so make hurry to go find someone who calls himself one and pay him a fee to produce a bunch of complex excel sheets. “ Wall Street is a place where people driving in with Rolls Royce take advice of people who come by tube” . Yes that’s Buffett again, on another truth of financial services.
In the event one does need help , its better to take it from someone who has seen life, success and achieved financial independence. More importantly, this person should of course have practical understanding of personal finance; products and belief in life planning.  Of course, you can employ some one for support with the paper work and logistics – in which case they should be remunerated suitably.
However, all this does assume one important thing – That one is willing to spare some personal quality time to gain adequate knowledge and organise your financial matters – failing which it is better to engage an “independent” financial adviser. Read “independent” as one who does not get (remotely, directly, indirectly) remunerated by a manufacturer of mutual funds, insurance, etc. and remunerated only on the (negotiated) “fees” you agree to pay.
The future is anyway unknown and any scenario we make up is subject to change –  Therefore, I believe quantifying the value of your Goals should be simple because, all I wish to do is give my life a broad direction.
This is because, I also believe that, the relevance and value of your Goals have to reviewed and adapted for changes in your life, earnings and more importantly in the expectations about inflation and investment returns.
The most opportune time for doing this (as I have said in earlier posts) is after I file my income tax returns every year.
I would hasten to add here that, whilst I may not easily change my Goals, I am always willing to change my plans around earnings and savings. Goals reflect your own vision of how you wish for your life to turn out and I do not believe it should be taken lightly and treated frivolously.Remember “your” is key !
The entire effort to calculate the monetary value of Goals involves 4 simple steps:
(1) Ascertain how much money would you approximately need “today” to fulfill this goal.
(2) Considering that, inflation will increase the value of this Goal when it’s up to be done in the future – Ascertain what would be its “Future Value”.
(3) Ascertain how much money you need to save every month, to accumulate that “Future Value”.
(4) Obviously the money you save month on month, will be suitably “invested” . Ascertain how much “Return” will you make on the monthly savings invested.
There are two important numbers you need
(1) Expected inflation rate in the long term and, (2) Expected rate of return on the money (saved) you have invested. (Leave the discussion on investment out for a later post – as it needs to be discussed in detail).

Expected inflation rate in the long term

CLICK HERE: To understand more about inflation

Predicting inflation is difficult even for economists. I usually refer to www.tradingeconomics.com to get the expected rate of inflation. We need to review this every year and adjust the “future value” of our goal and also the monthly amount being saved (during the next 12 months till next income tax returns are filed).

CLICK HERE for tradingeconomics.com   They say; “In the long-term, the India Inflation Rate is projected to trend around 4.80% in 2020, according to our econometric models”. Well, I like to be conservative and will add 1% to their rate and use 6% as the inflation rate in my calculations.

Expected rate of return on the savings I have invested

This too is a topic which we will discuss in some detail when we get to the posts on “Investment” . For the moment, I will assume a post tax return of 9% per annum.

This chart on “Life Cycle Stages” is merely to guide you when envisioning your own life goals.

I have provided you with its copy in Excel so that, you can change it to suit your own life progression.(remember it’s all about your life !)

As you will see you need only two simple Excel formulas (i) to calculate the Goal Future Value and (ii) to calculate the Monthly amount you need to save, in order to accumulate the money required for the Goal.

Considering I write for those young people beginning their working lives, I will start at the first life cycle stage (25 to 30 years). So, in the Excel Sheet, I have assumed some likely Goals a young person will have. 

Obviously, your ability to meet all your Goals will depend on how much money you can save to provide for them. This in turn will entirely depend on the “surplus” that’s left after your living expenses and unavoidable commitments. Which is why it’s critical to get a handle on your cash flows and expenses.

If you fall short of the monthly surplus, you have to prioritize the achievement of your goals.

Needless to say, not all Goals are equally urgent and important. The reasons for that will be personal to you  – which is why the need for “understanding yourself” i.e. your needs in light of your own peculiar life circumstances and personal aspirations.

Not everyone is as ambitious or seeks happiness in the same way , which is the reason plans are different – there may not be a right or wrong way and what works for you is right for you. The question really is, are you convinced if its right for you!

Having said that, I believe it’s the Emergency Fund which has to be your first priority.

CLICK HERE: To read more on Emergency Fund

I would even go to the extent of suggesting that, you should NOT take up “tax saving voluntary investments”  (I mean like contributing to voluntary provident fund, tax saving bank deposits and equity linked savings (mutual fund) schemes, etc. Pay only the minimum into your loan account that may be required to prevent a default.

Basically, save, save and save till you squirrel away at least 6 months’ net salary.

As for that MBA; it all depends on how critical further education (it could be any other degree. I have merely used MBA as an example) is to you.

If you are ambitious and looking for high professional growth, an advanced education is more likely than not, to be a prerequisite – which will mean, you have to see higher education as an investment in your future. However, you should realize that, it may have to come at the cost of pushing ahead some or even all your other goals.

Now this could be worth your while, if you believe this higher education, will give you the ability to considerably enhance your income potential – so much that, you will be able to achieve your life goals faster and possibly even gain the ability to upgrade them.

However, only you can take this call. You may if lucky, find a suitable mentor to help decide but remember, its your life – your call – gains and losses are yours alone!

Well if you believe, that MBA is crucial then postponing your wedding or maybe renting accommodation till you are ready to buy what you aspire for – may be your way ahead.  Before investing in a vehicle; it may be worth asking yourself – if it makes “economic sense”, especially if you can manage well with public transport in cities with a metro and an Ola or Uber!

As for vacations, this should possibly be the last of your priorities – after all even a holiday where one stays at home could be enjoyed like a vacation!

Of course , everything could look very different if you decide you do not need to go for advanced education  but, are you convinced you can progress in life without advanced education? Well its again entirely your call to make.

On the other hand, you may be one of those fortunate few who don’t need to save for a home because you have inherited one or live with your parents – I would nevertheless recommend to you that, you commence setting aside the minimum 15% of net pay towards your “retirement” because the earlier you begin the easier it gets. Even if you are left with a small surplus begin with it – no matter how small.

Well, lets now get on with “How to put a monetary value on your goals” without forgetting to keep it simple!

CLICK HERE: For the Excel Sheet to Quantify your Goals !

The Excel Sheets have been left unlocked so that, you can adapt them to your specific needs.

What is financial independence and why is it important ?


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