If you are avoiding financial planning due to complicated calculations, be it determining the future value of goals or life cover needed, here are the formulae and calculators that will ease your task, says ET wealth.
1. Future goal value
What will be the corpus you will have to save for a goal that is several years away?
Why do you need it?
As you set your goals, be it the child’s education or wedding, you will have to calculate the amount you need to save. The future value of the goal will be different from the current one because inflation will increase the value of the corpus you need. For instance, if you want to save for your three-year-old child’s education for a course that costs Rs 10 lakh today, you will have to find out how much it will cost 15 years from now, considering the rate of inflation at 7%.
Formula
Without the calculator, you will have to find out the future value by using this formula:
FV = PV (1 + r/100)n
FV: Future value
PV: Present value
r: Inflation rate
n: Number of years to goal
In the above example, the future value of the goal will be:
FV = 10,00,000 x (1 + 7/100)15
FV = Rs 27.59 lakh
2. Retirement corpus
How much money will you need in retirement so you can lead a comfortable life without the corpus running dry?
Why do you need it?
Calculating the amount for retirement is different from that for other goals as it takes into account various factors, such as the years left for retirement, existing household expenses, life expectancy, infl ation rate, rate of return during and after retirement, etc. It is a lengthy, tedious and complicated calculation, which is why a retirement calculator proves useful.
Formula
If you want to calculate the retirement corpus without a calculator, you will first have to find the inflation-adjusted household and medical expenses at retirement using the future value calculator. Then, consider the real rate of return after factoring in rate of return during the growth phase, the post-retirement phase, and inflation rate, using this formula:
r = {[(1 + R) / (1 + i)] - 1} 100
R: Rate of return after retirement
i: Inflation rate
Finally, calculate the corpus you will need at retirement by using this formula:
PV = X [1 - (1/1 + r)n] / r
n: No of years after retirement
r: Infl ation-adjusted return
X: (Inflation-adjusted expense at retirement) x (% age of annual expenses after retirement)
You will also have to factor in the existing investments and their future value at the time of retirement. This figure can be removed from the corpus calculated.
3. Goal corpus
If you invest a fixed amount periodically, what will be the size of the corpus after a specific duration?
Why do you need it?
While investing for goals, you need to know not only the corpus to amass, but also the amount to invest (future annuity) for a given corpus.
Formula
Find the value of corpus or investment by using this formula:
FV = R [(1+ i)n -1] / i
FV: Future value of annuity or desired corpus;
R: Periodic investment required;
n: Investment tenure;
i: Interest rate
If a 30-year-old wants to save Rs 50 lakh for a goal in 15 years by investing every month, with the investment growing at 12%, the investment required per month will be:
50,00,000 = R[(1 + 12/100)15 -1] / 12
R = Rs 10,008 per month
4. Life insurance
What should be the size of the term plan so that your family is fi nancially secure if you die?
Why do you need it?
We are often stumped by the quantum of cover we require to insure our lives. Though the rough estimate of a life cover needed by a person is 8-10 times the annual income, it is actually a factor of age, earnings, assets, liabilities and dependants. Since it may be difficult to make the calculation based on these factors, it is easier to fall back on the calculator.
Formula
For a 35-year-old, who plans to retire at 60, has an annual salary of Rs 9.6 lakh and monthly expenses of Rs 30,000, the sum assured can be calculated as follows:
i) Find the current annual expenses of your family and using the future value calculator, with inflation at 7%, determine the future annual expenses (A) for 25 years.
ii) Find the total assets (X) and liabilities (Y), subtracting the former from the latter (Y-X = B). Assume the assets to be worth Rs 20 lakh (EPF, mutual funds, etc) and liabilities (home loan, vehicle loan, etc) to be worth 40 lakh.
iii) Then consider other expenses you are likely to incur, such as child’s education (C).
iv) Now, add these up (A+B+C) and this will be the amount of life cover that you need.
A = Rs 2.4 crore | B = Y-X = Rs 40 lakh – Rs 20 lakh = Rs 20 lakh | C = Rs 30 lakh
Life cover: Rs 2.4 crore + Rs 20 lakh + Rs 30 lakh = Rs 2.9 crore
Calculator
https://www.hdfclife.com/financial-tools-calculators/human-life-value-calculator
5. Home loan EMI
What should be the EMI for a home loan you can take without straining your finances?
Why do you need it?
It is almost a given that you will buy a house with the help of a loan. However, before taking the loan, you should calculate the size of the EMI to know if you can incur the large expense every month without straining your budget. The split between the principal and interest outgo, as well as the repayment schedule over the loan tenure, will let you know the total amount you are repaying. It is a good idea to use the EMI calculators that most bank websites carry.
Formula
If you were to take a loan of Rs 30 lakh at 9% per annum for 15 years, here’s how you can calculate the EMI:
EMI = [P x R x (1+R)n] / [(1+R)n - 1]
P = Principal loan amount
R = Rate of interest (per month = 0.75/100)
n = Number of monthly instalments
EMI = [(30,00,000 x 0.75/100 x (1 + 0.75/100)180] /[(1 + 0.75/100)180 - 1)] = Rs 30,428
