Wednesday, June 26, 2013

Saving and Investing for Your Child's College Education


Dear Investor Juan,

Please don't laugh at my silly question but is it possible to invest 10,000 pesos on something (don't know what kind of investment - UTIF maybe). Long term, maybe 15 years long. would my 10 000 earn enough that it can send my son to college?? It is his birthday next week and I just kept on thinking about his future.


Nice blog by the way. i just stumbled it today and i kept reading about stocks and investments!


Dear Joriel,

It's not a silly question, there's no need to apologize.

Assuming that inflation would be 5% per year and diversified equity funds (such as equity UITFs) will grow at an average rate of 10% per year for 15 years, then the real rate of return of investing in equity funds is 5% per year (please see this post for some background on real rates of return). 10,000 compounded by 5% per year for 15 years is

10,000*(1.05)^15 = 20,789 pesos

At today's prices, would this amount be enough for your son's college tuition? (It's more than enough for some colleges and universities, actually).

If you want to send your son to a university which currently charges 150,000 pesos per year for tuition so that in 15 years you want to have 600,000 in today's peso, then you have to invest this much today:

600,000/(1.05)^15 = 288,610 pesos

If you want to invest in annual installments, you can use the PMT function in Excel using the arguments:

rate = 5%
nper = 15
FV = 600,000

And you'll get 27,805 pesos (please ignore that the answer in Excel is negative), the amount that you have to invest every year (before adjusting for inflation) to have 600,000 in 15 years, assuming that the annual real rate of return is 5%. It's perfectly doable if you ask me. :)

I hope I was able to help. Good luck!

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