The best way to take a long trip is to break it down into smaller trips, determining how far you can travel each day. If you take the trip one day at a time, focusing only on that day’s goal, you will easily make it to your ultimate destination.
That process is called the science of navigation. Applying this same process to the accomplishment of your financial goals will turn seemingly impossible objectives into smaller, easy-to-understand steps.
In last week’s column, I showed you how to make the cost of your goals more accurate by factoring in the effects of inflation. Now let us break them down to monthly costs you can start paying today just like you do with your house and car payments.
Knowing this cost, and of course paying it, should give you tremendous peace of mind. Not only will you have reduced the seemingly abstract cost of large future financial goals to a cost you can understand and afford, but you will also be taking the proper steps to ensure the accomplishment of those goals.
Determining today’s monthly cost of your goals
Below is a chart titled The Price Tag Chart, which will help you calculate how much you need to invest each month to achieve each of your goals. The Price Tag Chart shows how much money you will have accumulated after taxes at the end of the period indicated, if you invest $100 a month, assuming various annual returns. Results for other amounts can be calculated as fractions or multiples of $100. The table assumes that the investment is made at the beginning of each month.
In last week’s column, we used an example of needing to save $67,000 over five years for the down payment to buy a condominium. Let us use that as an example now using the Price Tag Chart below to see how this is done.
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First, pick an interest rate you believe you could earn on money invested for this goal. If you feel you can get 10 percent on your money, follow the 10 percent column down to where it meets the five-year column and you will find $7,808.
Then divide the required $67,000 by the $7,808 found in the chart and the answer is 8.581. Multiply this by $100 and you will see that a monthly investment of $858.09 at 10 percent growth over five years will develop the $67,000 you need.
Therefore, here is how to calculate today’s monthly cost of each of your goals:
- Start with the future cost of each of your goals as calculated at the end of last week’s column;
- Select a rate of return you feel you could achieve on money invested for the goal;
- Using the chart below, follow the interest column down to where it meets the number of years you have to meet your goal;
- Take that number and divide it into the future cost of your goal;
- Multiply that number by $100 and you have the monthly amount you need to invest at the interest rate you selected to meet your goal.
Now fill in the Monthly Costs for Goals chart below for each goal you have using the process above.
Calculating the costs of college
Helping children or grandchildren pay for college is a very common goal. It is a bit more difficult to calculate the price tag for this goal because college costs continue for four or more years, giving inflation more time to complicate matters.
The worksheet below will give you a good idea of what you need to invest in order to meet future college expenses. It is based on the following assumptions:
- Your child/grandchild will enter college at age 18;
- He/she will attend college for four years;
- Costs will grow by 7 percent annually;
- Your investments will earn 8 percent a year after taxes;
- While you are paying for college out of the fund, you will continue to save and your fund will continue to earn 8 percent annually.
1) Today’s cost of college. _________________________
(Call the college you would like your child/children to attend.)
2) Estimated future cost of 1st year of college.________________________
(line 1 times factor from column A in the College Multipliers chart below)
3) Amount that you would like to provide. ___________________________
(If you would like to pay the full amount, enter the number from line 2. If you would like to pay half, multiply line 2 by .5)
4) Estimated total future cost of your goal. ___________________________
(line 3 times 4.44)
5) Estimated amount you need to invest annually. ______________________
(line 4 times factor from column B in the College Multipliers chart below.)
6) Estimated monthly cost._____________________
(divide line 5 by 12)
The chart below contains the College Multipliers needed to complete the form above.
Using the information provided above, you should be able to successfully develop costs for all of your goals, including a college education plan for your child(ren)/grandchild(ren).