Stephanie wants to save for her daughter's education. Tuition costs $12,000 per year in today's dollars. Her daughter was born today and will go to school starting at age 18. She will go to school for 5 years. Stephanie can earn 12% on her investments and tuition inflation is 6%. How much must Stephanie save at the end of each year if she wants to make her last savings payment at the beginning of her daughter's first year of college

Annual deposit= $3,463.37

Explanation:

Giving the following information:

Tuition costs $12,000 per year in today's dollars.

Number of years= 18

She will go to school for 5 years.

Stephanie can earn 12% on her investments and tuition inflation is 6%.

First, we need to calculate the cost of each year and the total cost.

FV= PV*(1+i)^n

Year 1= 12,000*1.06^18= 34,252.07

Year 2= 34,252.07*1.06= 36,307.12

Year 3= 38,485.55

Year 4= 40,794.68

Year 5= 43,242.36

Total= 193,081.78

Now, we can determine the annual deposit required:

FV= {A*[(1+i)^n-1]}/i

A= annual deposit

Isolating A:

A= (FV*i)/{[(1+i)^n]-1}

A= (193,081.78*0.12) / [1.12^18)-1]

A= 3,463.37

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

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