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

No. of years in college isn't mentioned here. I am assuming a 4 year college degree.

Cost in year 1 = 20,000, in year 2 = 20,000 x 1.04 = 20,800, in year 3 = 20,800 x 1.04 = 21,632 and in year 4 = 21,632 x 1.04 = 22,497

PV of cost = 20,000 + 20,800 / 1.085 + 21,632 / 1.085^2 + 22,497 / 1.085^3

= 75,159 is the amount need to accumulate in 18 years

Monthly savings can be calculated using PMT function on a calculator

N = 18 x 12, I/Y = 8.5%/12, PV = -2,000, FV = 75,159

=> Compute PMT = $130.05 is the amount you need to save monthly for 18 years.