There are several factors that contribute on the Education Fund you need to prepare for your children's High School or college Education.
- Tuition Fee
- Miscellaneous Expense – i.e. allowance, books, uniform
- Inflation Rate – Natural increase of miscellaneous expenses. Average inflation rate is around 5.8% (1995-2009)
- Tuition Fee Increase – According to CHED, tuition fee increases 12.25% annually.
- No. Of Children
- Post-education interest rate – The interest rate of your investment instrument where your retirement fund will be used during your children's schooling.
- School Years
- No of years before your child start High School or College
- Annual Tuition Fee(Current) – Php 114,174.00 (Ateneo de Manila University)
- Annual Miscellaneous Expenses (Current) – Php 30,000.00
- Annual Tuition Fee Increase – 12.25%
- Inflation Rate – 5.8%
- No. of Children – 1
- Post-education interest rate – 2.5%
- School Years – 4
- No. of years before child start College – 15 yrs.
We will be using the Compounding Interest Formula for us to get the future value for tuition fee and miscellaneous expense.
Step 2: Calculate Real Interest Rate. This is the adjusted tuition fee increase and inflation rate
To make simple we will just deduct the Tuition Fee Increase and Inflation rate with Post-education interest rate
Adjusted Tuition Fee Increase = 12.25%-2.5% = 9.75%
Adjusted Inflation Rate = 5.8%-2.5% = 3.3%
Step 3: Calculate Total Educational Fund needed based on the result of Step 3
We need to use simple interest amortized loan formula. Yup, it's a bit complicated, instead, we will use the MS Excel Function "PV" to get the initial fund needed.
Fund for Tuition Fee = PV(AdjustedTuitionFeeIncrease,SchoolYears,-TutionFeeFuture,0)
=PV(0.0975,4,-646193.32,0)= PhP2,059,480.35
Fund for Miscellaneous Expense = PV(Adjusted Inflation Rate,SchoolYears,-MiscFeeFuture,0)
=PV(0.033,4,-69888.59,0)= PhP257,929.82
Add both fund and you will have the total Educational Fund needed:
PhP2,059,480.35 + PhP222,741.67 = PhP2,317,410.16
In summary, for you to be able to school your child at Ateneo, you need to accumulate 2.28M pesos worth of educational fund on the next 15 years.
Of course, this is not accurate as we could not predict the inflation rate and tuition fee increase on the next following years. The figures shown above should give you an idea of how much you most likely be needing in the future.
