This time we try to make an example financial planning simple. Hopefully it can help those who are making financial planning. You can adjust the numbers and growth according to your abilities, needs and conditions.
1 Billion Dream
Say you dream of wanting to make something happen in the future, for example buying a house, educating children, retirement funds, or whatever. Its current value is 1 billion rupiah.
You know, dreaming is not enough 😜, you have to do something about it. Then you try to do financial planning (Financial Planning).
Contoh Financial Planning
“By failing to plan, you are preparing to fail”
Benjamin Franklin
The first step, of course, is calculating how much your current ability is. How much funds can you set aside each month from your income.
After you count, you feel you can set aside 4 million a month or 48 million a year 🤑. Well, if this is the story, you need 21 years to reach 1M. But even this is still lacking, because the value of 1M in the next 21 years is much lower than the current 1M. Let’s say inflation is around 5% and we use this as the discount rate, the current value of 1M is equivalent to 2.8M 21 years from now. Not until this, dude! 🙈
So you decide to increase your investment fund by 5% per year, at least to offset inflation. This means that next year the investment funds you set aside will be 4.2 million/month or 50.4 million/year, the second year it will increase by 5% again, and so on.
How long before you can realize the dream of 1M?
From the table, look at the “Present Value” column. It turns out that even up to 60 years it has not materialized.
From the two ways above, you realize, it’s impossible to reach the dream of 1 billion just by saving 4 million/month, even if you have committed to increasing 5% each year. You need something else: investment.
Investment Returns
In order to accelerate achieving the dream of 1 billion, then you start considering investment. You have to find a way to beat inflation and Time Value of Money (TVM) which continues to decline. I have previously made a living article on dividends, there you can also see investment simulations that focus on dividend income, complete with table examples.
There are several investment instruments, ranging from ORI, Mutual Funds, property, or stock investment. Determine which one fits your profile. This article will not discuss investment options, maybe another time. This time, we will work on the investment return target and how fast the investment return can help you get closer to the dream of 1 billion.
Clear, the target return should logically be above inflation. Oh God, if the return is below inflation, the total value of your money is obviously always eroded every year, eaten up by inflation. Especially now is the era of high interest rates.
So if inflation 5%you must look for assets that can provide returns more than 5%. Also read the article Interest Rates vs Fixed-Rate Bonds: Interest Rate Risk.
I’ll just use the 10% figure. There is nothing special about this number, just as an example.
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Financial Planning: Achieving the Dream of 1 Billion
OK, so now you can set aside 4 million/month, every year you can increase your investment fund by 5%, we assume 5% inflation, and target return of 10%/year.
How long before you can realize the dream of 1M?
Look at the table above, you need about 14 years to realize the 1M dream.
You can see in the table, actually your funds in the next 14 years will be around 2 billion. But because there is inflation and TVM has fallen, 2M is equivalent to 1M today (see Present Value column). The higher the inflation, the more the value of your money will be eroded in the future and vice versa.
If you look in more detail, the 2M comes from additional capital and returns, which are relatively the same value, namely 1M each.
We can extend this table period.
Examples like the table above, a period of 30 years. The return portion is 10.7M vs 3.4M capital. The longer the period, the greater the portion of return on capital.
The two sample tables below I use different returns, namely 8% and 15%. For consideration and comparison.
With an investment return target of 8% you need 16 years, while a 15% investment return you need 11-12 years to achieve the dream of 1 billion. 🤑
Conclusion
So in order to realize the dream of 1 billion, you can start by doing financial planning. The main factor that determines whether it is achieved or not is that you can set aside funds routinely and with discipline. Another factor is the inflation rate (related to the Time Value of Money in the future), the rate of return on your investment, and the investment period.
That’s all dudes. Please if you have comments, additions, or suggestions.
