Put yourself in a parent’s shoes: You have two children, aged 2 and 6 respectively (exactly). When they are exactly 19 years old each will be attending university. You will require a lump sum for each of them at that time. For the first child to go to varsity the cost will be R 59 867.00. Due to inflation, the tuition fees for your second child will be 20% higher than for the first. You have decided to invest a single lump sum today in order to pay for both sets of tuition. The fixed deposit you are considering offers an effective interest rate of 13.5% per annum. How much should you invest today?
To calculate how much you should invest today, we need to calculate the future value of the lump sum needed for each child's tuition at the time they turn 19.
For the first child, the future value of R 59 867.00 in 17 years (since they are currently 2 years old) at an interest rate of 13.5% per annum can be calculated using the formula:
FV = PV * (1 + r)^n
FV = R 59 867.00 * (1 + 0.135)^17
FV = R 59 867.00 * (4.544262)
FV = R 272 207.86
For the second child, the future value of tuition fees 20% higher than R 59 867.00 in 13 years (since they are currently 6 years old) can be calculated using the same formula:
FV = PV * (1 + r)^n
FV = R 59 867.00 * (1 + 0.135)^13
FV = R 59 867.00 * (3.324687)
FV = R 199 057.37
Therefore, the total lump sum needed to pay for both children's tuition at the time they turn 19 is R 272 207.86 + R 199 057.37 = R 471 265.23
So, you should invest R 471 265.23 today in order to pay for both children's university tuition fees when they turn 19.