Question

You just got a job and plan to save for the college expenses for your kids. You have a son and a daughter. Your son is 4 years old, and your daughter is only 1 year old. Both of them plan to go to a four-year college at the age of 18. The estimated college expense is about $40,000 per year. Assume you plan to invest into a portfolio that offers you return about 6% per year until your daughter is graduated from college. How much money do you need to save every year if your first saving is in one year

Answer 1

Answer:

$11,508.25

Explanation:

your son will start college in 14 years, and the present value of his college tuition = $40,000 x 3.4651 (PVIFA, 6%, 4 periods) = $138,604

your daughter will start college in 17 years, so you need in today's dollars $138,604

you will need to save enough money to cover both tuitions;

money required to cover your son's tuition = $138,604 / 21.015 (FVIFA, 6%, 14 periods) = $6,595.48

money required to cover your daughter's tuition = $138,604 / 28.213 (FVIFA, 6%, 14 periods) = $4,912.77

total annual savings = $11,508.25