Are you saving for kids to go to college? Check out my new savings calculator that does all the math.

Saving for higher education

As people who understand firsthand the financial power of higher education, most physicians encourage their children to follow in their footsteps, at least to the level of a college degree.  But that degree comes with a significant cost—an ever increasing one.  If you are in the stage of life where you are saving for kids to go to college, looking years ahead to the cost of attendance can be jaw-dropping.  If you don’t start early with a solid investing plan, getting your kids through those first four years can be a major financial burden.

The next couple of blog posts will help to address some of these questions and concerns.  In this one, I am introducing a new downloadable tool that I have created and is available for free on the “financial tools” section of my website, www.bryanjepson.com.  It is a college savings calculator, and it is easy to use. 

Financial advisors have a variety of software options at our disposal with these types of calculators built in, but if you are a CFP, at least, you learned how to do it the old-fashioned way using a good old financial calculator and punching in all the numbers.  The other option available to everyone is to do the same thing on Excel.  That is how I built this one but added a few features like the option for partial funding, for starting out with a lump sum already invested, and for the possibility that a grandparent or someone adds to it with a one-time gift at some point during those saving years.  Plus, it generates graphs for those that are more visually oriented. 

College savings questions are a great target for CFP examiners because it requires several different “time value of money” calculations to come up with the correct answer, and there are a variety of ways to ask the question that can be quite tricky.

There are three basic steps:

1.      First, you have to figure out how much a year of attending college will be when your child turns 18.  For this, you need to input the age of your child now, the cost of a year at your target institution, and the rate of tuition inflation at that school (not the general inflation rate). You can find some of that information on-line under the financial aid sections of the given school. Using a financial calculator or Excel, you can then calculate the FV (future value) of a year of attendance. 

2.      Next, you calculate the total cost of the 4 years of attendance and how much you will want to have available on day 1. This will require you to “inflation-adjust” the interest rate using the expected rate of return of your investments against the tuition inflation along with the ever-escalating yearly tuition.

3.      Finally, you have to find the PV (present value) of that total cost of tuition in today’s dollars factoring in your expected rate of return on your investments and then decide if you want to save in annual or monthly installments.

So, yeah, it’s a bit complicated.  That’s why financial planners pay to use software!  But, if you are a DIYer and want to figure it out on your own, use my calculator tool—it does it all for you!  You just need to add the assumptions into the input summary on the form (the yellow boxes) and it spits out the answers in green. 

The most important lesson you should learn by playing around with this tool is that the earlier you start saving, the less painful it is.  If you wait for the last few years before your kids go off to college, you are going to be plopping down a significant chunk out of your paycheck every month to catch up. 

If you look at the cost of education and are wondering how to make it all work along with everything else that you have going on financially, including saving for your own retirement, feel free to reach out to us at Targeted Wealth Solutions.  We can help you see how it fits within a comprehensive customized plan.  Here is a link to schedule an exploratory call with me: 

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