How Much to Save or Invest to Reach a Goal

This tutorial illustrates how to use the Ultimate Financial Calculator to answer the question, “How much do I have to invest each period to reach my goal?”

Time value of money calculations, at their simplest, involve five variables:

1. Starting Amount — called present value, or PV
2. The cash flow amount — payment, savings, or investment amount
3. Ending Amount — called future value, or FV
4. Interest Rate
5. Term — the time between PV and FV, or the number of cash flows

The Ultimate Financial Calculator can easily solve for any of these five variables. This tutorial focuses on solving for the cash flow amount. The concepts shown here apply equally to any type of cash flow — whether it’s a payment, savings, or investment.

All users should work through the more detailed first tutorial to understand the Ultimate Financial Calculator’s (UFC) basic concepts and settings.

Background: Let’s try a practical example. Suppose you want to pay cash for your next car. The anticipated price is $32,600, and you expect to purchase it four years from now. You currently have $4,000 saved.

To create a cash flow schedule that meets this goal when the required periodic investment amount is unknown, follow these steps:

1. Set Schedule Type to Savings.
   • Alternatively, click the New button to clear any previous entries.
2. Click Settings, then select Rounding Options. Set “Rounding” to Open balance — no adjustment.
3. In the header section, make the following settings:
   1. For Calculation Method, select Normal.
   2. Set Initial Compounding to Daily.
   3. Enter 4.5 for Initial Interest Rate.

4. In row 1 of the cash‑flow input area, create a “Deposit” series.
   1. Set the “Date” to July 16, 2024.
   2. Set the “Amount” to 4,000.00 (this is the current cash on hand).
   3. Set the “# Periods” to 1.
      • Note: Since the number of periods is 1, you will not be able to set a frequency. If a frequency is entered, it will be cleared when you leave the row.

5. Click row 2 of the cash‑flow input area. Select Deposit for the “Series”.
   1. Set the “Date” to August 1, 2024.
   2. Set the “Amount” to Unknown.
   3. Use the Tab key to move to “# Periods”. Set it to 48.
   4. Set the “Frequency” to Monthly.

6. Create a third series. Set the “Series” to Withdrawal.
   1. Set the “Date” to August 1, 2028.
   2. Set the “Amount” to $32,600.00.
   3. Set the “# Periods” to 1.

• Your calculator should now look like this (Fig. 1):

7. Click Calculate. The result is $526.67.
   • Invest $526 every month for 4 years at 4.5% to pay cash for the car. See Fig. 2.

8. To view a detailed cash flow schedule showing interest earned on the monthly deposits, click Schedule.
   • Total deposits: $29,280.16. See Fig. 3.
   • Total interest earned: $3,320.05.

This tutorial illustrates the time value of money working in the consumer’s favor. Does the car cost $32,600? Yes. But how much did you actually pay? In one sense, just $29,280—the balance was covered by the return on your investment. The contrast is even greater if you were to finance the car over 4 years at 4.5% interest. In that case, you would pay more than $3,000 in interest for the convenience of financing.

*This is a simplified example. It does not account for taxes, nor does it consider whether your investments might earn a higher return than your loan’s interest rate. If so, it might be more advantageous to finance the purchase instead of paying cash.

Back to the Ultimate Financial Calculator.