How much money do we need to reach our financial goal? Setting the model

At this point it is almost inevitable to introduce a bit of math. To be fair - and being "ordinary" - I will not introduce anything complex or complicated. I would not be able to handle it myself most likely!


What we need is a simple mathematical model to describe what we want to achieve based on our personal financial goal:

  • We want to have an income starting from a certain date and paid for a relatively long amount of time
  • We want this income to account for inflation (to avoid a loss of purchase power)
  • We want to understand how much we should invest to generate this income when we need it

All the above points are found in the concept of Growing Perpetuity. The formula is as follow:

Where the elements are:

  • Desired Cash Flow is the amount of money we would like to receive as income on a yearly base 
  • Expected Return is the return we expect to achieve from our investments
  • Inflation refers to the expected inflation

The Capital is the amount of money or wealth we need to have at the end of the timeframe we gave ourselves to reach our goal and is the result of the equation. 


Now the key part is to populate the right side with numbers, so that we can calculate the required capital. 


PS everyone that has studied a bit of finance will recognize that the elements of the equation have been adapted to fit my purpose. For the original one, you can click here.

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