Plan Your Financial Future planning for your child’s higher education

[SlideRule]

An excerpt from Plan Your Financial Future a comprehensive guide book to growing your net worth {1e}, © 2013 APRESS, ISBN-13 (electronic): 978-1-4302-6065-3, pages 199-204

Part V Distributing Wealth During Your Lifetime

Chapter 15 Planning for Your Child’s Higher Education

We now move to the last step in the PADD process of wealth accumulation
and management: distributing your wealth. Toward that end, this section of the
book focuses on the distribution of wealth during your lifetime and considers
the common financial goals of saving and planning for your child’s higher
education and your own retirement. It also discusses how to save and plan for
other lifetime financial goals you may have, such as starting your own business.
Then, the last section of the book takes up the process of distributing your
wealth at death.
…
How Much Will I Need?
As with any financial planning goal that may be quantified, the first question
to answer with respect to planning for your child’s higher education is how
much money you will need. The answer to that question depends on several
factors, including how many children you have and whether you wish for them
to attend public or private colleges or universities. In 2013, private-college Ivy
League institutions (elite institutions), such as Harvard and Yale, are among
the most expensive to attend, with tuition, fees, and room and board costs
averaging at least $50,000 per year. Meanwhile, private liberal arts schools
throughout the country are not far behind in cost. Finally, the cost of attendance
at public schools varies greatly, but for planning purposes, using half of
the current cost of attending an elite private school—or $25,000 annually—is
not unreasonable.
The first step in computing the cost of your child’s education is to inflate, or
calculate in today’s dollars, what the current cost of attendance—say, $25,000
annually—will be when your child is ready to attend college. To do this, you
need to assume an annual increase in costs of a certain amount—say, 7 percent
annually (this is higher than the current ten-year average increase, but
not unrealistic when considering the financial pressure that the 2007–2009
recession placed on many state budgets). You can input these numbers into a
web-based calculator (at http://money.aol.com, for example), or you can
enter them on a financial function calculator. Here is an example using the
Hewlett-Packard 10BII financial function calculator:
      1. Enter $25,000 as the present value (PV). Note: With this
          calculator, you need to enter this amount as a negative
          number so the calculator can distinguish between the PV
         amount you are entering and the future value amount
         (FV) for which you are solving.
      2. Enter 7 as the projected annual percentage increase (I/YR).
      3. Enter the number of years (N) until your child enters college;
for instance, if your child is 10 years of age, enter 8,
because age 18 is the typical age for beginning college.
      4. Solve for the FV of the cost of one year of attendance: in
          this case, the cost would be $49,178 per year.
Once you have completed this calculation, you need to determine the present
value of the total sum that will be required to fund your child’s college education
for their estimated four years of attendance. The steps are as follows:
      1. Shift your calculator into BEGIN mode (you will need the
          money at the beginning of the period when your child
          enters college at age 18).
      2. Enter $49,178 as a payment (PMT). Note: You may need
          to enter this amount as a negative number because it is
          a cash outflow to you, depending on what calculator you
          are using.
      3. Enter 4 as the number of years (N) of college
          attendance.
      4. Enter an inflation-adjusted annual rate of return (I/YR) on
          the monies set aside to fund the education; for example,
          if you believe you can make a 10 percent annual before-tax
          rate of return on your investments, the number you will
          enter is 2.8037 (1.10 divided by 1.07 less 1 times 100).
      5. Solve for the PV or lump-sum amount needed to pay for
          the cost of a four-year college education in today’s dollars.
          Using the assumed numbers, the amount is $188,810.
The third and final step (after you’ve picked yourself up off the floor!) is to
determine the amount of annual savings required to accumulate a lump sum of
$188,810. The steps are as follows, assuming that you intend to save monthly
in order to accumulate this sum:
      1. Enter $188,810 as a FV amount, because you are solving
          for the amount of monthly payment needed today, while
          the child is 10 years old.
      2. Multiply 8 years by 12 months (96) for the payments you
          need to make over the period you are saving. Enter this
          as N.
      3. Divide the 10 percent annual assumed before-tax rate of
          return by 12 to convert to a monthly rate, and enter this
          as I/YR (here, 0.8333).
      4. Solve for the monthly payment or savings amount needed:
          $1,280.96 per month ($1,291.64 if you do not save this
          amount until the end of each month). This translates into
          a one-time lump-sum deposit of $85,122.20.
A word of caution as you consider the challenge before you: many people do
not have the financial resources to accumulate this amount of money quickly.
The important point is not to focus on the end of the process, but rather
the beginning. In other words, begin to save some amount, even if it is not the
amount that you should be saving. Probably the worst planning alternative is
to do nothing, because you will quickly find other ways to spend the required
savings. As part of the “pay yourself first” savings strategy, at least do what you
can to provide for your child’s college education.

BEST!
SlideRule

[dm319]

(10-19-2024 12:06 AM)SlideRule Wrote:  Then, the last section of the book takes up the process of distributing your
wealth at death.

After the game, the King and the Pawn go into the same box.