Education Cost Planner
What a child's education will cost later, and the monthly saving to meet it.
Recent
Formula
How the calculation works
Two steps that people collapse into one. The cost of a course is inflated forward to the year the fees fall due, because a year of study that costs 100,000 today will not cost that in ten years. Then that future cost is funded by a monthly saving that earns a return of its own.
The second step is where the arithmetic is usually wrong. Dividing the future cost by the number of months ignores the return and overstates the deposit; dividing by the annuity-due factor of the saving rate gives the smaller, correct figure. On the worked example the naive division would ask for about 1,799 a month instead of 1,172.
Common mistakes
- Planning for today's cost. Fees rise with inflation, and over a decade the same course can more than double, as the example shows.
- Dividing the future cost by the months alone. That drops the return the saving earns and asks for a bigger deposit than needed.
When to use it
- Use it when a known future expense has both an inflation rate and a saving rate to plan against -- school and university fees being the common case.
- It assumes one lump sum is needed at the end; for a cost spread across several years, plan each year separately.
Worked example
A cost of 100,000 today, 8% inflation, 10 years, saving at 8%: future cost 215,892.50, monthly deposit 1,172.27.
Common questions
Why is the monthly deposit so low?
Because the savings earn too. Dividing by the months alone drops the return and overstates the deposit; here it is divided by the annuity factor of the saving rate.
How is inflation applied?
It is compounded at the same rate each year, which is how costs tend to rise rather than by simple interest.
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