Question

2. You are 20 years old and anitcipate you will have your first child when you are 25 years old. At 25 years old, you want to save at the end of each month for the next 18 years. You anticipate that when your child goes to college, tuition room and board to be paid at the beginning of each year will cost $20,000. Education inflation is expected to be at 4% each year. If you can earn 8.5% on investments from when you are 25 years until your child completes college and you put $2,000 down at 25 years old as you start investing, how much money in real dollars do you have to save to achieve this goal accounting for education inflation?

Answer 1

Assuming that the college will be of four years, and college will start after 18 years when we will be 43years of age.

Beginning of	Fees	PVF @ 8.5%	Present Value
Year 1	$20,000.00	1.000	$20,000.00
Year 2	$20,800.00	0.922	$19,177.60
Year 3	$21,632.00	0.849	$18,365.57
Year 4	$22,497.28	0.783	$17,615.37
TOTAL	$75,158.54

So, till the age of 43 we will require $75,158.54 from our investmment.

8.5%per annum means 0.7083% per month. There will be 216month, let the monthly investment be X

So,

$2000 * (1.08518) + X[(1.007083216) - 1]/.007083 = $75,158.54

$8,684.91 + 507.30X = $75,158.54

X = $131.03