College Savings Calculator Calculate Amount Needed For Education

College Savings Calculator

A College Savings calculator can calculate the amount required to cover the education cost when the child is ready to enter college.

About College Savings Calculator

The formula for calculating College Savings is below:

College savings calculator

P / (( ( 1 + r )n*F – 1 ) / r)

P is the college amount required at a particular year.
r is the rate of interest.
n is the number of periods for which savings shall be made.
F is the frequency of interest is paid.

Periodical College Savings is made, then the calculation:

i = P / (( ( 1 + r )n*F – 1 ) / r )

Wherein,

i is the amount required to be savedP is the college amount required in a particular yearr is the rate of interestF is the frequency of interest is paidn is the number of periods for which savings shall be made.

College Savings Calculator, as defined earlier, can be used to calculate the amount that an individual will want to save for his child for his future education expenses, which doesn’t become a liability on that individual as the cost of education is more. It increases with the rate of inflation. One can calculate the number of estimated expenses when the child enters college, consider the time left for investment, and save the amount periodically, either monthly or annually, as per the individual standards. College expenses are no longer cheap and are increasing as time passes, so the individual must save the amount beforehand, earn the same, and fund their child’s expenses without hesitation.

How to Calculate College Savings?

One needs to follow the below steps in order to calculate the amount for Retirement.

Step #1 – Determine the child’s age and the gap between their current age and the age he would be entering into college.

Step #2 – Estimate the college expenses for the entire period and determine the future valueDetermine The Future ValueThe Future Value (FV) formula is a financial terminology used to calculate cash flow value at a futuristic date compared to the original receipt. The objective of the FV equation is to determine the future value of a prospective investment and whether the returns yield sufficient returns to factor in the time value of money.read more as those expenses will increase with inflation.

Step #3 – Now, determine if any savings have already been made.

Step #4 – Determine the interest rate and divide the interest rate by the number of periods the income shall be paid. For example, if the rate paid is 4% and compounds semi-annually, the interest rate would be 4%/2, which is 2.00%.

Step #5 – Now, use the formula discussed above to calculate the amount required to be saved periodically depending on case to case.

Step #6 – The resultant figure will be the amount required to be saved to fund the college expenses.

Example

Mr. Akshay, a proud father of Mr. Karthik, has groomed his son very well and is performing well in his studies. His son is currently nine years old. However, Mr. Akshay is a middle-class person, and he understands that when his son reaches the age of 18 years, the college expenses will be high, and he also considers an inflation rate of 2%. His college will last for four years, and his college expenses will include Tuition fees and Room and board expenses of $10,000 each year. Mr. Akshay has shortlisted a scheme wherein he will invest monthly and earn interest on the same 10% per annum. Further, no pre-investment is made by Mr. Akshay, and he wants to save $150 per month starting today.

Based on the given information, you are required to calculate the monthly savings Mr. Akshay is required to make and whether he requires increasing the savings amount, reducing the same, or meeting the requirement. Assume monthly compounding for investment.

Solution:

We are given the below details:

I = Initial savings are Nili = The monthly savings need to be figured outr = Rate of interest, which is 10% and is compounded annuallyF = Frequency which is annually here; hence it will be 1n = number of years the College Savings proposed to be made will be different from retirement age less current age (18 – 9), which is nine years for 1st-year fees. Similarly, for second-year fees, we have 11 years, 12 years, and 13 years, respectively. Fees are paid at the end of the period.

The inflation rate is 2%, so the fees will not be fixed and will increase so that we will calculate the future value of the fees.

= ($10000 * ( (1 + 2% ) ^ 13 – 1 ) / 2%) – ($10000 * ( (1 + 2% )^ 9 – 1 ) / 2%)= $146,803.32 – $97,546.28= $49,257.03

Similarly, if we calculate the individual year FV, we get the below results for years 10, 11, 12, and 13, and the total would be the same as we calculated.

For example, for year 10:

= (10000 * ( ( 1 + 2%) ^9)= $11,950.93

Similarly for Years 11, 12 & 13

FV(Year 11) = (10000 * ( ( 1 + 2%) ^10)

= $12,189.94

FV(Year 12) = (10000 * ( ( 1 + 2%) ^11)

= $12,433.74

FV(Year 13) = (10000 * ( ( 1 + 2%) ^13)

= $12,682.42

Now, we can use the below formula to calculate the amount required to be saved.

For each future value, we shall calculate, and we shall use the nominal rate of interest, which is 10%.

= 11,951 / (( ( 1 + 0.83% )10 * 12 – 1 ) / 10.00%/12 )= $58.34

Similarly for years 11, 12 & 13

For (Year 11)= 12,190.02 / ((( 1 + 0.83% )11 * 12 – 1 ) / 0.83% )

= $51.03

For (Year 12) = 12,433.82 / ((( 1 + 0.83% )12 * 12 – 1 ) / 0.83% )

= $44.98

For (Year 13)= 12,682.50 / ((( 1 + 0.83% )13 * 12 – 1 ) / 10.00%/12 )

= $39.89

Therefore, the total monthly savings he is required to make is $58.34 + $51.03 + $44.98 + $39.89, which equals $194.24, and he is saving $150 and needs to increase the amount by 44.24 dollars a month.

Conclusion

As discussed above, the College Savings calculator can be used to calculate the amount of savings that the individual can make to fund the expenses in the future and save themselves from immediate huge cash outflow or from taking any loan for education and thus also saving from paying interest on a loan.