Savings Plan

THE GIRL NINJA

Lisa Gaspar

(Third of a series)

Since the amount, P5,945,971, we computed above is the estimated expenses 13 years from now which is the number of years before my imaginary child, Ella, is supposed to start college, then we need to adjust this figure to today’s equivalent.

This process is called the present value of money which means that a P100 today is doesn’t have the same value as a P100 a year from now. This difference in value is due to inflation rate and the interest our money can earn through investments such as the interest we receive from our bank deposits.

Let me illustrate this concept by using the following:

If I have P100 in January 1, 2013 to buy sinandomeng rice for P40 per kilo, then I can buy a total of 2.5 kilos. However, on December 31, 2013, because of inflation the price per kilo of sinandomeng rice increased by 3%, I need P103 to buy 2.5 kilos which means that the value of my money from January 1 to December 31 decreased by 3%.

Now if I deposited P100 in a savings account on January 1, 2013 with my favorite bank in Ilocos Norte and assuming the bank manager liked me so much she gave me 3% interest rate for my savings account. Then on December 31, 2013, I would have P103 in my savings account which means that the value of my money from January 1 to December 31 remained the same.

If I can earn 3% for my investments related to Ella’s college fund, then 13 years from now, I should have a total of P5,683,833. For as long as my imaginary daughter is in college and as long as her college fund earns 3% a year, then I need no longer to make additional deposits for her college funds. What this means is that even if I die a day before Ella needs to pay for her tuition fee for her first trimester for her first year, she will have no problem paying for it through her college fund. As a matter of fact, she will not have a problem financing her entire college education from her college fund.

The question now is, how much do I need to save every month or every year for the next 13 years starting now so I will have P5,683,833 on her college fund 13 years from now.

Assuming that my investments for her college fund will earn 3%, then starting today I would need to deposit P29,836 every month in my savings account which is also equivalent to P363,933 every year for the next 13 years.

Assuming that my investments for her college fund will earn 6%, then starting today I would need to deposit P24,141  every month in my savings account which is also equivalent to P301,016 every year for the next 13 years.

The higher the interest rate of your investment, the lower the amount you have to save every month or every year for your children’s educational fund.

If you think that the above estimated figures are too high and clearly beyond your means, then please bear in mind that these are just estimates. These figures will change if the estimates for tuition and other expenses and  inflation and interest rates change.

Regardless of how high you think these figures are, I encourage you to compute the equivalent figures for your children. This way at least you will learn you baseline figure and you know what you should save to provide the best for your children.

Children have no choice on whether they be born in a wealthy or poor family, but as parents we chose to have them. Consequently, the burden for financing their education shouldn’t be passed on to the children. It is us, parents, who should.

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*If you want to know the breakdown of this amount, send me an email and I will gladly explain.

Please don’t hesitate to email me if you want my help computing for the amount you need to ensure that your children will have enough to use for their college education. I would be glad to help. Oh! Didn’t I tell you that I work for coffee?

(Liza M. Gaspar is a wealth coach and personal finance enthusiast. She also volunteers for the Rotary Club of Makati McKinley (rcmmckinley.org) and the Gerry Roxas Leadership Awardees (grlawardees.org). Engage her in a discussion about anything you fancy at www.thegirlninja.com, liza@thegirlninja.com or www.facebook.com/annalizagaspar).