Your child is 10 years old and you are planning to open an account to save for his/her college tuition. Your child
will start to attend first year of college in 8 years. You would like to save in equal annual instalments over the next eight years to have enough to pay for
his/her first year of college. If you know the real interest rate you can earn a year and you know the inflation rate, how much must you save each year?
This part of the College Savings is an explanation of what to be careful for and what to look for when calculating Savings for College. Second part, or
Savings for College 2 provides you with a calculator to find out how much money your child might need several years from now for College education. So, let's start...
Let's say that you child is 10 years old and you are planning on opening an account to provide for his/her College education. Tuition per year is $8,500 and is expected to increase
at the rate of 3% per year. If you put $6,000 into account paying an interest rate of 4% per year, will you have enough to pay for your child's first year of College eight years from now?
If you compute future value of $6,000 at an interest rate of 4% per year for eight years, you will get:
$6,000 X 1.04^8 = $8,211.41
Because $8,211.41 is very close to $8,500, it might appear that $8,211.41 is going to be enough for your child's first year of College. However, you forgot to calculate tutiton as well.
Tuition will also increase by inflation rate, at least, and you need to calculate that as well. If the inflation rate is 5% per year, on average, the new tutition level after 8 years
will be:
$8,500 X 1.05^8 = $12,558.37
This amount is much bigger than your savings of $8,211.41 after eight years.
Go to
Savings for College 2 to find out right numbers.
