When you start saving for your kid’s education, it is always better to factor-in the inflation to arrive at the cost of the goal. As the cost of education is rising, the cost of the courses that are prevalent today may not remain the same 15-20 years down the road. You, therefore, should calculate the inflated cost of the goal to invest the right amount to reach the goal comfortably.
An engineering course that may cost about Rs 7 lakh today will cost you anything upwards Rs 20 lakh after 16 years, post factoring an inflation of 7 per cent. Similarly, a post graduate degree or any other course for higher studies that cost Rs 20 in today’s cost may become Rs 60 lakh after adjusting for inflation.
Therefore, before starting to invest use the below formula to find the actual impact of inflation.
Inflated Cost (IC)= Present Cost (PC) (1+r/100)n
IC= Inflated cost of your goal
PV= Present cost of your goal
r = Inflation rate
n = Years left to reach your goal
Now, assuming the following:
PV = Present cost of your goal = Rs 5 lakh
r = Inflation rate = 7 per ccent
n = Years left to reach your goal = 16 years
IC = Inflated cost of your goal = 5*(1+.07)^16 = Rs 14.70 lakh
It shows that at an inflation rate of 7 per cent, the cost of the goal which was Rs 5 lakh balloons to almost Rs 14.70 lakh after 16 years!
The reason to calculate inflated cost is because it will help you save the right amount. If you do not take into account the impact of inflation, you will end up saving less than what is actually required. This means, there could be a shortfall in maturity amount after reaching the goal.
By saving Rs 850 per month, at an assumed annual growth rate of 12 per cent, you can get Rs 5 lakh after 16 years but after factoring in inflation, you need Rs 14.70 lakh. So, you need to actually invest Rs 2500 every month to get Rs 14.7 lakh after 16 years.
To get Rs 1 crore after 15 years, at an assumed growth rate of 12 per cent, you need to invest Rs 20000 each month. You can use inflation calculation and SIP calculator to plan your investments and reach the long term goals with ease.