Even the fact that TVM involved a lot of computation did not deter my interest (this from a person who chose her college course based on the number of math units required. Math 1 for the win!), and I actually stayed up past midnight a few days after my class researching on TVM and solving problems. Imagine that!
Anyway, what really hooked me on TVM was how I could start planning for Ace's college fund starting now, and for as little as Php5,000 a month. Here's how I plan to go about it:
A) Research on current rate of tuition fees. This infographic by GMA News is very helpful.
B) Predict how much the future tuition fee will be. Let's pretend that my 10 month old son is accepted to ADMU 18 years from now, how much will a semester's tuition fee be by then?
With a 10% increase rate per unit every year, here's how the problem can be laid out:
Present date: 4/12/14
Future date: 4/12/32
Present value: Php160,000 (1 year tuition fee)
Compounding period: annual
Future value is Php889,586.77 / year x 4 years = Php3,558,347.08 needed for a 4 year course.
C) Decide what investment vehicle to use. I have 18 years to come up with Ace's tuition fee so I can afford to be aggressive with my investing. However, from experience, I know that I don't have the required diligence to monitor the stock market, so I'll do the next best thing and invest in an equity fund.
D) Choose the equity fund to invest in. I chose First Metro Save and Learn Equity Fund (FAMI-SALEF) as my equity fund of choice because it had a low opening requirement (Php5,000) and I could top up monthly using my Metrobank Direct online account.
Using the 5 year performance of FAMI-SALEF, you get a yearly average of 27.47%
E) Use compound interest to your advantage. If you opened an account with FAMI-SALEF today, and topped up with Php5,000 every month for the next 18 years you would have set aside Php1,080,000.00. But with the use of compound interest, your investment can balloon to 3x-4x its actual value. Here's how the problem can be laid out:
Present value: Php10,000 (the minimum opening amount for FAMI-SALEF)
Monthly addition: Php5,000
Years to grow: 18
Interest rate: 12% (even if the 5 year average is at 27.47%, past performance doesn't guarantee future performance, so let's be prudent and peg it at 12%)
Future value: Php3,421,882.56 which is just Php100,000 less than our target amount of Php3,558,347.08.
F) Automate your monthly top-ups or develop the habit of making monthly top-ups.
G) Move money to a safer vehicle once you've reached the target amount. When you've reached the target amount, move it to a less volatile investment vehicle (i.e. bonds, bond fund, time deposit) because you want to keep your money intact for your child's education.
And that's that. It's not so difficult right?