The SIP a goal needs, worked through
The goal
A goal that costs ₹25,00,000 in today's rupees and falls due in 12 years, with ₹3,00,000 set aside for it.
- Its cost then. ₹25,00,000 × (1 + 6%)12 = ₹50,30,491.
- What is set aside, grown. ₹3,00,000 × (1 + 10%)12 = ₹9,41,529 in 12 years.
- What is left for the SIP. ₹50,30,491 − ₹9,41,529 = ₹40,88,963.
- What 144 SIPs of ₹1 grow to. At 0.7974% a month (10% a year compounded), each counted at the start of its month, ₹1 a month for 144 months grows to ₹270.31.
- The SIP. ₹40,88,963 ÷ ₹270.31 = ₹15,127 a month.
Checked the other way, ₹15,127 a month for 144 months at 10% comes to ₹40,88,963, and with the ₹9,41,529 that the money set aside has become, ₹50,30,491: the target.
Why the cost is grown first
A target is a sum of rupees on the day the goal falls due, so a cost known in today's rupees has to be grown with inflation to that day before it is compared with what a SIP builds. Left in today's rupees, the SIP comes to ₹5,766 a month, ₹9,361 less than the ₹15,127 the goal needs. It builds ₹25,00,000 with the money set aside, which is ₹12,42,423 in today's rupees and ₹25,30,491 short of the goal's cost then.
If the goal is nearer or further
The same ₹25,00,000 goal and ₹3,00,000 set aside, with the date moved:
| Years to the goal | Its cost then | SIP a month | Paid in |
|---|---|---|---|
| 5 | ₹33,45,564 | ₹37,091 | ₹22,25,486 |
| 8 | ₹39,84,620 | ₹23,116 | ₹22,19,131 |
| 12 | ₹50,30,491 | ₹15,127 | ₹21,78,289 |
| 15 | ₹59,91,395 | ₹11,798 | ₹21,23,592 |
| 20 | ₹80,17,839 | ₹8,287 | ₹19,88,850 |
The nearer the goal, the more a month it needs, and the further, the less: 20 years takes ₹8,287 a month, 5 years takes ₹37,091.
If the return is different
The same goal, 12 years, with the return changed:
| Return a year | SIP a month |
|---|---|
| 8% | ₹18,002 |
| 10% (Pocket's assumption) | ₹15,127 |
| 12% | ₹12,534 |
What the projection assumes
- One return, 10% a year, every year, with nothing taken out before the goal.
- One inflation rate, 6%, for the goal's cost. A cost that rises faster than 6% needs a higher target.
- A flat SIP, the same amount every month. A SIP that steps up each year can start lower; the step-up guide works that through.
How Pocket works it out
The figures on this page are Pocket's own, from its goals engine when the page was built. The Goals page checks a goal the same way: the target as typed, the money tracked against it, the SIP that reaches it, and what it is short by. It takes the target as a sum on the goal's date, so a cost known today is grown with inflation first, as above.
Questions
How is the SIP a goal needs worked out?
The goal's cost is grown with inflation to the year it falls due; the money already set aside is grown at the assumed return; and what is left is divided by what a SIP of ₹1 a month, counted at the start of each month, would have grown to by then.
Why is the target higher than what the goal costs today?
Costs rise: at 6% a year, something that costs ₹25,00,000 today costs ₹50,30,491 in 12 years. A SIP sized to ₹25,00,000 would reach ₹25,00,000 in 12 years, which by then buys less than the goal does today.
What if the return is lower than the assumption?
The SIP needed is higher: ₹18,002 a month at 8% instead of ₹15,127 at 10%. The assumption is labelled because returns are not assured.
Sources
- Pocket's goals engine: required_monthly_sip and project_corpus, each SIP counted at the start of its month, and the planning engine's 6% inflation
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