Step 2 - Assess
Future Financial Needs
The costs of education, retirement and home
ownership are substantial and require careful
financial planning, scrupulous savings and
patience.
How do I go about funding my future needs? Universities and pension funds are well versed in budgeting for future liabilities. Are you? Here is a quick lesson.
First, you will have to make an educated guess as to your future liabilities. You must take into consideration the effect of inflation on prices of goods and services. An education that costs $100,000 today will likely cost substantially more when adjusted for inflationary pressures. Therefore, you must complete a future value calculation that will approximate the future cost of an education. Once you have estimated your future liability, you can determine the amount of money you must invest today to reach your target level of funding. By performing a present value calculation, whereby you discount the future value of funds by an appropriate interest rate, you arrive at the approximate amount you will need to invest to cover your future expenses.
How does my risk tolerance affect my ability to fund my future liabilities? While both risk averse and risk tolerant investors can meet their financial liabilities, the risk tolerant investor will be able to invest less money up front. Because she/he holds riskier assets, she/he expects a higher rate of return than a risk averse investor.
Get started on assessing your future financial needs: Download Our Worksheet
How do I go about funding my future needs? Universities and pension funds are well versed in budgeting for future liabilities. Are you? Here is a quick lesson.
First, you will have to make an educated guess as to your future liabilities. You must take into consideration the effect of inflation on prices of goods and services. An education that costs $100,000 today will likely cost substantially more when adjusted for inflationary pressures. Therefore, you must complete a future value calculation that will approximate the future cost of an education. Once you have estimated your future liability, you can determine the amount of money you must invest today to reach your target level of funding. By performing a present value calculation, whereby you discount the future value of funds by an appropriate interest rate, you arrive at the approximate amount you will need to invest to cover your future expenses.
How does my risk tolerance affect my ability to fund my future liabilities? While both risk averse and risk tolerant investors can meet their financial liabilities, the risk tolerant investor will be able to invest less money up front. Because she/he holds riskier assets, she/he expects a higher rate of return than a risk averse investor.
Get started on assessing your future financial needs: Download Our Worksheet
Assess your future liabilities now: Download Our Worksheet