How to plan and invest for a goal

The investing done by most people is adhoc and haphazard in nature. Following is an easy way
to identify, plan and invest for your goals.

1. Identify the goal(s) that you want to save for. These could be buying a house, buying a
   car, children’s education, your own retirement planning, vacation etc.
2. Find the cost of the goal in the current cost terms. For e.g., if you are looking at buying a
   house, what is its current cost, or children’s education – what would be the current cost
   of the higher education for the 4/6 years that the child will be studying?
3. Identify the duration before the goal is due – say house in 3 years, education in 5 years,
   retirement in 25 years.
4. Find out the inflation for the goal. The inflation for each goal would be different. So,
   house prices may increase only 6% year on year, the retirement expenses at retirement
   will grow at 5-6% but education expenses will grow at 8-10%. These are the current
   expected inflation rates in India.
5. Inflate the cost of your goal in the year in which it is due. This can be done by using the
   following formula – (1+inflation %), this number needs to be multiplied by itself the
   number of times you have left for the goal. So if education expenses are due in 5 years,
   then at 8% inflation – 1.081.081.081.081.08 or (1.08)^5 will give you the final
   inflated cost factor. This comes to 1.47.
6. Multiply the current cost with the inflation factor. If the education cost is 10 lakhs per
   year for 4 years, it will be 14.7 lakhs in the first year, 15.8 lakhs in second year, 17.1
   lakhs in third year and 18.5 lakhs in the fourth year. Combined amount required would
   be 66 lakhs at time of goal.
7. This will need you to save approximately 7-8 lakhs per annum for next 5 years at
   expected return of12% till the goal is due.
   These are only illustrative numbers to show how the numbers can be worked out and how
   inflation impacts the cost of goals.