While the cost of college is supposed to be free at present (if you ignore the €2,750 registration fee), not many believe this will continue for too much longer. Looking at the UCD website, you can expect to pay from €5,857 to €8,935 per year in fees. Add in the cost of books and rent if your kids move away and you are looking at a big drag on cashflow if you pay from your salary each year. So how much do you need in an education fund and how do you go about calculating it?
The €5,857 cost will not be €5,857 due to inflation, so we need to inflation proof the cost. Assuming an average inflation rate of 2.5% per annum, the cost of college fees in 12 years when my son is 18 will be €7,877.
Now my son is in college, I have to remember that the cost in year 2, 3 and 4 will also increase in line with inflation. I also have to remember that the lump sum I have saved will be moved into a cash fund to keep it safe from stock market volatility. That lump sum will earn interest over the time he is in college.
If I divide the net interest rate by inflation, I will get a discount factor to use in calculating the actual cost needed when he starts college. Formula: (1+ net interest/1+inflation)-1)*100. In this example, deposit rates at 2% and DIRT is 41% (1.0118/1.02)-1*100 = -1.2878%
With fees of €7,877 (remember, we are deducting inflation from the interest rate earned on deposit), we will need a fund of €32,549 to fund for 4 years college in 12 years time.
You can fund for the education fund by way of making a lump sum payment now or starting a savings plan, or a combination of both. We will assume that the fund grows by 6% each year (3.54% net of taxes at 41%). I can invest a lump sum of €21,440 today or invest €182 per month for 12 years to have the education fund that I need to cover my sons college fees.
If you have any questions, please contact me directly at steven@bluewaterfp.ie