Question

Two of the three children intend to study at university after they finish high school. Emma and Chris would like to pay the university fees. Only the fees – the children will be responsible for meeting their living expenses. For planning purposes, allow AUD75,000 for each child and assume this amount will be allocated in full when each enrolment is confirmed. One child will commence university in four years and the other child will commence university in six years. Discuss the key issues that need to be addressed by Emma and Chris as they consider a savings plan to fund the university fees of their children. As part of your response, estimate the amount of savings required per year required to achieve their objective (assume annual contributions and bank interest on deposits at 5% and clearly state other key assumptions and show calculations).

Emma and Chris 48 and 46 Married, home owners Three teenage children Lawyer and Biochemist AUD250,000 pa (Emma) and AUD145,000 pa (Chris) from salary AUD125,000 pa including the home loan Cash at bank AUD25,000 Superannuation AUD250,000 Home AUD1.5 million Car AUD25,000 Home loan AUD1.0 million Repay home loan within five years

Answer 1

Key issues are the availability of the required income to set aside the amount needed. The amount needed to be saved every year for elder child is AUD 17,400.89 for 4 years and for the second child, AUD 11,026.31 for 6 years. For both the children together, the amount required as of now, is AUD 26,427.20

The amounts are arrived at using PMT function of Excel.

These calculations are based on the following assumptions:

1. Yearly contributions are deposited at the end of each year, commencing year 1

2. Interest is compounded at yearly intervals

3 Amount for each child (Future value as per assessment) will be paid at the beginning of the study period which is immediately after the savings period viz. 4 years for first child and 6 years for the other.

Details of computations, with cell reference in one case, is appended below:

C10 1 5% F =PMT(C3,C6,08,07,09)*-1 A в Amounts in AUD Child 1 Child 2 3 Interest rate Rate 5% 4 Number of years 5 Number of payments a year 6 Number of payments Nper 7 Future amount required Fv 75,000 75,000 8 Present value 9 Timing of payment Type 10 Yearly savings required Pmt 17,400.89 11,026.31 11 12 Total savings required a year= AUD 17,44.89+ AUD 11,026.31 28,427.20 Pv 13