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How Much to Save or Invest to Reach a Goal
Tutorial 17

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 - length of time between PV & FV or the number of cash flows

The Ultimate Financial Calculator can easily solve for any of the five variables. This tutorial discusses how to solve for the cash flow amount. The concepts learned here can be applied to any cash flow calculation, be it a payment cash flow or a savings or investment cash flow.

This example applies to our online    Ultimate Financial Calculator. The     C-Value! program for Windows works in a similar way and has a few more features including the ability to save your work.

All users should work through the first tutorial to understand basic concepts about the calculator.

Background: Let's try something novel. Assume you want to pay cash for your next car, the price will be $32,600 and you anticipate needing the car four years from now. Further, you currently have $4,000 on hand.

To create a cash flow schedule that will achieve your goal when the necessary periodic investment amount is unknown, follow these steps.

  1. Set "Schedule Type" to "Savings"
    • Or click the [Clear] button to clear any previous entries.
    • The top two rows of the grid will not be empty
    • Delete the 2nd row by selecting it and clicking on the [Delete] button
  2. Set "Rounding" to "Open balance — no adjustment" by clicking on {Settings} {Rounding Options}
  3. In the header section, make the following settings:
    1. For "Calculate Method" select "Normal".
    2. Set "Initial Compounding" to "Daily".
    3. Enter 4.5 for the "Initial Interest Rate".
  1. In row one of the cash flow input area, create a "Deposit" series
    1. Set the "Date" to July 16, 2016
    2. Set the "Amount" to 4,000.00 (this is the 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 set, it will be cleared when you leave the row
  1. Click on the second row of the cash flow input area. Select "Deposit" for the "Series"
    1. Enter the "Date" as August 1, 2016
    2. Enter the "Amount" as "Unknown"
    3. Use the [Tab] key to move to "# Periods". Set it to 48
    4. Set the "Frequency" to "Monthly"
  1. Create a 3rd series. Set it to "Withdrawal"
    1. Enter the "Date" as August 1, 2020
    2. Enter the "Amount" as "$32,600.00"
    3. Set the "# Periods" to 1

Your calculator should now look like this:

How much to save?
Preparing to calculate an unknown investment amount
  1. Calculate the unknown. The result is $526.67
    • Invest $526 every month for 4 years at 4.5% and you'll be able to pay cash for the car.
How much to save result.
How much to invest result.
  1. To see a detail cash flow schedule showing what the monthly deposits earn in interest, click on the [Schedule] button
    • Notice deposits total $29,280.16
    • Savings earn $3,320.05 in interest
Savings schedule
View the schedule to see total P&I earned

This tutorial illustrates the time value of money working for the consumer. How much does the car cost? $32,600? How much did you pay for it? In one sense, you paid $29,280. The balance of the cost is covered by the return on your investment. The contrast is even greater if you financed the car for 4 years at 4.5% interest. You'll pay over $3,000 more for the car, due to interest, for the privilege of financing it.*

*This is a simplified illustration. For one thing, it does not consider taxes. It also does not allow for the possibility that you may earn more on your investments than the interest rate you have to pay on an auto loan. If that's the case, it could be better to finance an auto rather than pay cash for one.