Shikha has to guess two key elements. The first is the amount he may need for his child’s education. This can be gauged by looking at the cost of higher education today. Then he has to guess what it will cost 15 years from now. For this, he has to assume the rate of inflation that can be applied to education expenditure. Given the positive rate of inflation, he would need 15 years more amount from today. Suppose the education she is planning for her child is worth Rs 5 lakh today. Assume an inflation rate of 7%.
Shikha can do her calculations using functions in MS Excel. She can open a worksheet inside the application, and key her numbers into the cell. He should click “fx” from the status bar at the top of the sheet and choose “Financial” as the category. In the list that appears, she can scroll to arrive at the FV or future price. Clicking on it opens a dialog box. ‘Nper’ is the number of periods (15), ‘rate’ is the inflation rate (7%), ‘PMT’ is excluded, and PV is the current cost of higher education (500,000). The resulting amount is Rs 13,79,515. This is the amount he would need at the end of the 15 year period considering his assumptions.
MS Excel can be used to make such estimates of goals and assign them a certain number. In the example above, we have not used “PMT” as it would apply when the amount is not a lump sum, but is required from time to time. PV is the present value which is the current cost of education. FV is the future value that is estimated over a 15-year period, assuming a 7% increase in PV. Shikha can then add up the numbers to see how her need may vary based on her beliefs – today’s cost of education, number of years and the rate of inflation. Saving for a goal is easier when it is anticipated.
(Content on this page is courtesy of Center for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Aarti Bhargava and Labh Mehta.)