How do I calculate how much money I need for a certain amount

[deepblackblue]

I want my three kids to have (more or less) the same amount of savings when they reach 18. Interest rates will change and they'll receive gifts in the coming years, which means I'll have to accept some differences in the outcome. For the sake of calculation, I will pretend the interest rate is fixed for the next 18 years. I will make an initial deposit and will not be making any monthly deposits after that.

How do I calculate the amount I need to deposit now in order to have the same amount in x, y, and z years? Maybe even include a fixed inflation rate.

 

[kaytiedid]

@deepblackblue Since you do not have monthly contributions the formula is:

FV = PV(1+r)[sup]n[/sup]

where FV is the future value, PV is the present value, r is the annual return, and n is the number of years.

[h4]If you put 1000 euros today in 18 years assuming fixed inflation of 2% and 0% interest rate, you will have: 1000(1+(-2/100))[sup]18[/sup] = 695 euros, inflation-adjusted.[/h4]

You can solve the equation also for PV given the desired FV amount.

Suggestion: Instead of putting the money in a savings account, invest it into VWCE and sell the shares in 18 years.

 

[deepblackblue]

@kaytiedid Thank you.

I'm already buying index funds for my kids but I want them to have some disposable cash for when they want to get driving lessons, buy some furniture when they go to university, etc. This cash would approximately be 20% of their total savings when they reach adulthood, aside from what they earn themselves.

 

[bearjmg]

@deepblackblue If it's more than 4 years out you're better off putting it into an index than having it in a savings account.

Savings accounts now days how interest rates at less than 1%. Inflation is between 3% and 4% yearly. You'd be losing 2% to 3% in value every year.

 

[moshlawd]

@deepblackblue Given interest rates are almost 0 and have been for almost 15 years, any money you put into these accounts will likely be eaten by inflation by the time they're adults, if the trend continues.

 

[teresad788]

@deepblackblue You could use something like https://engaging-data.com/fire-calculator/

There's also https://www.honestmath.com for more complicated calculations

 

[langingi777]

@deepblackblue The simplest solution is to just have 1 bank account and then give each of them 1/3 of the bank account on their respective 18th birthday. That is likely to be far more accurate than guessing inflation and interest rate over an 18 year period. I would also recommend that you invest the money instead of keeping it as cash. If you were to invest €10 000 for 18 years at 8% return you would have €40 000 instead of just the €10 000. Investing is really good, and if you want them to have some cash when they are 18 you can simply sell of some of the investments (1/3 on each 18th birthday).

 

[katescreates]

@deepblackblue If you want the same then just start saving for the oldest kid now then start paying for the others when they reach the same age as the oldest. Make sure you give an appropriate amount that you can afford all 3 at some point. Up to you if you want to increase 2% or so each year to account for inflation. Also up to you if you want to add on some lump sum at 18 too

 

[prayerwarriorjd]

@deepblackblue Makaros622 has the correct formula, with that said, with that time horizon you can do MUCH better by investing instead of the bank. Look into this company called Acorns, they may have solution for your needs.

 

[deepblackblue]

@prayerwarriorjd Investment is already taken care of, this is just expendable cash come university life

 

[ddavdson]

@deepblackblue Its better to invest it regardless. When they start nearing university, few years before that you could start moving the money into less risky assets. Anything you put into a savings account today will devalue.

In order to keep it fair between all your kids, put all the money into a common pool and separate their percentage share on their 18th birthday.

 

[nishan]

@deepblackblue amount to invest now = target amount / (expected annual return ^ years)

Where expected annual return is expressed as e.g. 1.07, meaning 7% return.

And to adjust for inflation, you can just reduce the expected return by the amount of inflation, e.g. 1.05 for 7% return with 2% inflation.

 

[emm3635]

@deepblackblue I would suggest making an educated guess right now (using makaros' formula) but then topping up the account when the kid reaches age 18. So for example, if the first child has 10,500 euros at age 18 (you were aiming for 10k), and the second child has only 9,700 euros at age 18 (awww...), then you top up that second child's account with 800 more euros to get to the same 10,500 euros for the second kid. If the third kid then has 10,800 euros at age 18 ... you give its siblings each 300 euros more.

By the way, if the kids are a lot of years apart, then inflation will eat into the results, and then the same amount in euros will be worth less to the second and especially the third child.

 

[deepblackblue]

@emm3635 That's a sensible suggestion, thank you.

And yes, there will be a teaching opportunity on inflation when the others figure out the youngest receives more money, if only nominally