Question

Your child is currently 2 years old. You plan to save for your child’s college education expenses by depositing 5% of your annual salary into an account that pays 6% interest compounded annually. If your salary is $100,000 next year when you make the first deposit, and you expect your salary to grow at 4% a year after that. How much do you have saved in 16 years when your child goes to college?

Answer 1

Salary Next year = $100,000

Saving amount from salary = $100,000*5%

=$5000

Salry will grow at 4% each year, thus annual saving will also grow each year with it.

Calculating the amount saved in 16 years using Future value of Growth annuity:-

Where, C= Periodic Savings = $5000

r = Periodic Interest rate = 6%

g = Growth rate in savings = 4%

n= no of periods = 16

FV = $166,842.61

So, amount you have saved in 16 years when your child goes to college is $166,842.61

If you need any clarification, you can ask in comments.     

If you like my answer, then please up-vote as it will be motivating