Typically, many investors want to create a corpus of Rs 1 crore after a decade or more. In some cases, the corpus is to take care of retired life, whereas in others, it is mean for children’s education or marriage. Some investors just like the idea to have a corpus of Rs. 1 crore after some years. This raises many questions in our heads: has the person just picked up a random number? Or has she worked with real numbers? Has the person accounted for inflation?
Many investors have an affinity towards round figures and Rs 1 crore tops the list of such numbers.
Is a big, round number sufficient?
A figure that appears big today may not be sufficient to take care of all your future financial needs. This is important because the value of money does not stay same forever. For example, if the course fee Rs 20 lakh today. It would not remain the same after 15 years. Because of the impact of inflation, it would cost much more. First, you may find out how much your daughter’s education cost now. Then you can find out how much it would cost after 15 years. To understand the impact of inflation, ask yourself ‘How much I used to spend 10 or 15 years ago?’. Once you answer this question, you will realize that inflation erodes the real value of your money and a big figure will not be worth the same after a few years.
Let us see how much 1 crore is worth in 10, 15, 25 and 30 years’ time.
In 10 years | In 15 years | In 25 years | In 30 years | |
Worth | 50 lakhs | 36 lakhs | 18 lakhs | 13 lakhs |
Division Factor | 2 | 2.8 | 5.4 | 7.6 |
For example, to find how much is Rs. 1 crore in 15 years use the division factor of 2.8. That means, Rs 1 crore today will be worth (1 crore/2.8) approximately Rs. 36 lakhs after 15 years.
Assessing the Impact of Inflation
Let us see how much you would need in 10, 15, 25 and 30 years’ time to have an equivalent wealth worth Rs 1 crore today.
In 10 years | In 15 years | In 20 years | In 30 years | |
Equivalent Corpus | 2 | 2.8 | 5.4 | 7.6 |
Multiplication Factor | 2 | 2.8 | 5.4 | 7.6 |
For example, take your child’s higher education. Let us assume that it costs Rs 20 lakh today. Let’s assume again that he would go to college in 15 years. Now you need to determine how much this education (which costs Rs. 20 lakhs today) is going to cost after 15 years. Use the multiplication factor of 2.8 from the above table. That means, after 15 years you will need a corpus of (Rs. 20 lakhs * 2.8) = Rs. 56 lakhs to fund your child’s higher education.
For the mathematically inclined, we present the detailed calculation below:
Future Value (FV)= Present Value (PV) * (1+r) ^ n
where;
FV= Future value of your goal
PV= Present value or current cost of your goal
r= annual rate of inflation (in %)
n= time left to reach your goals (in years)
Putting the values of the above example in formula, assuming education inflation is 7 per cent, the same education course will cost Rs. 56 lakhs after 15 years.
Conclusion
From the above discussion, we clearly understand that it is wise to add a realistic inflation figure to all your future financial requirements. If you are planning to create a sum for post-retirement life, you have to be more calculative and cautious. Apart for inflation, you must consider possibility of your outliving your expected age and change in interest rates post retirement.
Scripbox recommends you revisit and recalculate your goals. You have to work with real numbers as only being a crorepati will not help.
Find all this too much? Don’t worry. Scripbox’s goal-based investment methodology allows you to not only plan what your future requirements could be but also how much you need to invest today to achieve that. We take all the guesswork out of your planning to ensure that you are more likely to achieve your goal.