Education Needs Analysis (Slides) Flashcards
3 Step Method Overview to Calculate Dollars Needed to Save for College
Step 1: Determine the cost of the first year of college
Step 2: Determine the present value of the total cost of college the year the child begins school
Step 3: Determine the necessary savings
First Year Cost: use the education inflation rate only
PV of Total Cost: use both the inflation rate and the rate of return. This is an Annuity Due problem
Current Cost to the Client: use the rate of return only
Financial Planners Tell Clients: Expect Better Returns
Step 1 for Calculating Savings Needs for College Inputs
Step 1: Determine tuition costs for the first year the child attends college (FV)
Use:
I/Y: Education inflation rate
-PV: Current Cost of tuition
N:: Number of years until the child begins college
Step 2: Calculating Present Value of the Total Cost of College
PMT: the cost of the first year the child will attend college
I/Y: use both the investment growth rate and the education inflation rate
N: number of years the child will attend college
This is an Annuity Due problem. The money is needed by the time the child begins college
Step 3: Calculate the Amount Needed to Save Each Month (or Year)
PMT: Solving for this
FV: Total cost of college
N: number of months (or years) until the child begins college
I/Y: rate of return on investments
Remember to adjust N and I/Y to reflect monthly or annual savings