Joe has two children, Sydney age 5 and William age 2, that he wants to provide for their education funding. Currently, tuition is $10,000 per year and tuition inflation is 6%. Joe expects to earn 10% on his investments and he expects the children to start college at age 18 and go to college for 4 years. Joe wants his last savings payment to be made when the oldest child starts college. How much must Joe save at the end of each year?
Step 1: Determine the NPV at time period zero of the cash flows. Recall that this step determines the amount that could be deposited today, to satisfy the education funding need.
Step 2: Determine the annual savings required to meet the education goal.
Note: During this step it is important to determine two criteria: (1) How long does the client intend to save and (2) When will the savings payment be made? In this problem, Joe's oldest child is 5 and he intends to save until she starts college, which is in 13 years. He also indicates that he wants to "save at the end of each year" which indicates that this is an ordinary annuity problem.