Lesson 2 - Value of Money - Part 8

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Our next column comes from multiplying our Future Value (Ordinary Annuity) by the Amount Required. We are left with the total amount needed in the future for each of our goals at their due date. Now that we have that total future amount needed to accomplish our goal, we can now calculate how much we need to save annually to achieve that goal.

We need to repeat the same process that we used to find the “Future Value of $1” column. We need to determine what interest rate our investment will earn over its lifetime. 5% to 8% is a safe average that one could expect to earn over the course of a year with most investments. Our last column is calculated by dividing our “Adjusted Inflation Amount” by the “Future Value of our Annuity”. We now know how much we must save every year to achieve each of our goals at their relative due time. We could divide the sum of all the Goals by 12 and end up with a monthly payment also.

In the case of our example we need to save roughly $12,000 every year. This figure will become known as our Required Annual Savings. It is important to note that as each Goal is accomplished in the future, the need to save for that Goal is eliminated. For example, our children’s Education in 17 years will be due, thus we will no longer have to save $798 dollars a year. This money could be used for a new Goal or used to strengthen another Goal that already exists.

Now that we have some numbers to work with we can create a schedule to see if our savings needs can be met. If we remember that most people don’t start out there career’s making the maximum amount of money. The typical person will start off earning more money as their career progresses. This means that we might not have the $12,000 available at the moment to save for our goals. We must create a workable savings plan so that we can adjust some numbers. Often people can only make small savings payments in the beginning but are able to make larger one’s later on to offset the interest they missed out on.

Every person and family is different. There is no one solution for everybody, this is part of making a plan that fits right for you.