About the savings goal calculation
This inverts the usual investment question. Instead of asking what a monthly amount grows into, it asks what monthly amount is required to hit a number by a date — which is the form most real goals actually take, whether that is a deposit, a car, or a child's education.
Formula
PMT = Target ÷ (((1+i)ⁿ − 1) ÷ i × (1+i))
The inverse of the SIP maturity formula.
i = monthly rate, n = number of monthsWorked example
To reach 1,000,000 in 10 years at 12%: i = 0.01, n = 120. PMT = 1,000,000 ÷ 232.339 = about 4,304 a month, of which only 516,000 comes out of your pocket.
Frequently asked questions
What return should I assume for a short goal?
Something low, or nothing at all. Money needed within three years should not sit in volatile assets, because a drawdown right before the deadline cannot be waited out. For short goals, plan on deposit-style returns.
What if I cannot afford the monthly figure?
Three levers, in order of effectiveness: extend the deadline, lower the target, or accept more risk for a higher expected return. The first two are within your control; the third is not.
Should the target be adjusted for inflation?
Yes, if the goal is years away and its price will rise — education and property both inflate. Work out the future cost with our inflation calculator first, then use that as the target here.
Sources
- Inverse of the annuity-due future value formula