Nov 12, 2014
Planning for a child's college expenses is a major financial goal for many parents. Unfortunately, this is an area filled with conflicting advice.
Some people feel that saving for college is a financial goal of utmost importance; others feel it's not worth the money. Many that desire to save for the goal get constantly conflicting advice on whether to do a pre-paid tuition plan, 529 college savings plan, EE education bonds, cash value life insurance policy, or any of a couple other dozen exotic ways to plan for this expense.
Today, we continue our college series by teaching how to do a calculation of the need. I teach you how to use a simple financial calculator and paper and pen and come up with a precise dollar amount to save for.
Enjoy!
Joshua
Links:
- The historical rate of inflation of college expenses
- Current cost of tuition at UF
- Previous shows in this series: Part 1, Part 2, Part 3, Part 4
- Free web version of the HP12C financial calculator for you to use
How to manually do the math for the college need on a financial calculator:
Step 1: Calculate the cost of the first year of college with a simple future value (FV) calculation.
PV = -$20,550 (cost of college today)
n = 17 (years between today and first year of college)
i = 6% (rate of inflation of college tuition)
PMT = 0
solve for FV
FV = $55,336.48 (cost of college in the first
year)
Step 2: Calculate how much money you need to have available when your child is in their first year of college.
PMT = $-55,336.48 (cost of college each year)
n = 4 (four years of school attendance)
i = 1.89% (inflation-adjusted return: [(1.08 / 1.06)-1] x 100 =
1.89%
FV = 0
solve for PV (make sure your calculator is in BEGIN mode)
PV = $215,262.97 (amount needed in first year for four
years' tuition)
Step 3: Calculate how much the parents need to save in either a lump sum (PV) or yearly amount (PMT) or monthly amount (PMT-convert i and n to monthly amounts).
LUMP SUM VERSION
FV = $215,262.97 (amount needed in first year for four years'
tuition)
n = 17 (years between today and first year of college)
i = 8% (rate of return of investment portfolio)
PMT = 0
solve for PV (if you want a lump sum)
PV = $-58,178.90 (lump sum amount needed today to fund the
cost)
YEARLY SAVINGS VERSION
FV = $215,262,97 (amount needed in first year for four years'
tuition)
n = 17 (years between today and first year of college)
i = 8% (rate of return of investment portfolio)
PV = 0 (current amount of savings)
solve for PMT (if you want yearly payment amounts...look for info
in a case scenario on whether to use BEGIN mode or END mode)
PMT = $-5,905.67 (yearly amount needed to fund the cost)