Financial planning is the tool you use to go from where you are now to the financial independence you crave. It’s not enough to simply earn money; you must make money work for you. – Brian Tracy.
It is considered here in our country that the best gift we can give to our children is to provide them with good quality education. Yes, we do need to pay for tuition fees especially if we want to enroll them in an “AAA” school.
Have you started funding for the education of your children? If yes, do you have a target of how much money you need? How did you compute for your target? Have you considered the average annual increase of tuition fees? Where are you putting your funds? What is your time horizon? If not, when will you start? These are the things we need to answer in building the educational fund of our children.
In the recent GMA news, it shows the current tuition fees of some of the big universities and it daunt on me how much the cost will be after these years. Here is the figure from GMA.
photo from GMA 7 NEws
Then I remember the financial plan I did for my officemates, Mr. and Mrs. Smith (not their true name) which includes the educational fund planning of their two children and let me share this to you.
As per Mr. and Mrs. Smith, one of the important financial objectives they want to attain is to build an educational college plan for their children, Daughter and Son.
As of today, the current tuition fees for College in a Class A school is around P120,000 per year and may increase by around 12.25% per year. The Future Value (FV) for Daughter’s annual tuition fee in year 13 is P539,018.65 and this is for the first year alone. With that, the total amount needed to fund the whole college education of daughter is P2,585,598.76.
On the other hand, the education fund for their son with the same assumption and computation above except that their son will need the fund in 15 years. FV value of the annual tuition fee of Son is P679,166.87. Thus, the needed fund for this is P3,257,870.60.
The picture below shows the details and assumptions of the computation to fund the college education of their children. It is recommended that the Mutual fund amounting to P23,000 and UITF of P51,000 be used for the educational fund of their children. For their daughter, the FV of P2.56 million of college plan will be reduced by the FV of the Mutual Fund and the benefit from the Educational Plan they purchased in 2008. The MF (balanced fund) will have a FV of P62,551.35 in year 13 assuming an annual rate of return of 8%.
On the other hand, The educational plan will give them an installment benefit totaling P750,000 beginning year 13. With that, the total educational fund needed in year 13 will be P1,773,047.41 and to build this amount, the couple needs to make a monthly investment of P6,497.57 expecting an 8% return annually.
For the education fund of their son, we subtracted the FV of the UITF (bond fund) which has a present value of P51,000 and a regular subscription plan of P1,000 assuming a 6% return annually. Further, the fund needed amounting to P3.26 million will be subtracted by the FV of the said UITF amounting to P415,977.48, thus, resulting to a target fund amounting to P2.84 million. This fund will require a monthly investment of P8,212.66 in an investment vehicle that generates an 8% return annually.
Hope you did get some idea in doing your own financial plan. Just comment below if you need assistance or if you have questions. Thank you for reading.
Laurent Dionisio, CPA, RFP©
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