Jeff and Mary Douglas, a couple in their mid-30s, have two children - Paul age 6 and Marcy age 7. The Douglas' do not have substantial assets and have not yet reached their peak earning years. Jeff is a general manager of a jewelry manufacturer in Providence, RI while Mary teaches at the local elementary school in the town of Tiverton, RI. The family needs both incomes to meet their normal living expenses and to meet unforeseen emergency purchases. Their cash flow situation is tight and they have had difficulty growing a "nest egg" through savings and investing.

Jeff and Mary have discussed the needs of their two children who are typical, healthy, and active kids. They have discussed trying to have Mary stay at home, be with the kids more and run the household but her income is very much needed and she also wants a career and doesn't want to put her teaching job on hold to be a stay-at-home mother. Jeff also wants (and needs) to work and his job often requires long days - beyond the 9-5 grind.

Now that both children are in school there is no day care need and Mary's job schedule actually matches nicely with the children's schedule so she not only wants to continue to work but is thinking about completing a graduate degree. Currently, Mary is able to take most of the summer off from teaching (when the children are home on vacation) and so she enjoys a great deal of flexibility in the summer and spends quite a bit of time with the children in the summer.

Jeff is the breadwinner of the family but Mary's contribution is also very significant. Jeff earns about 65% of the total household income with Mary earning the remainder. By completing a graduate degree, Mary could increase her salary by at least 20% but she would need to commit to a continuing education program at either Providence College or URI.

Although their net worth is not substantial, they have big dreams and aspirations. Their personal financial objectives include goals that if achieved would provide a better life for their children than both Jeff and Mary had growing up in working class families in the Fall River and New Bedford areas. They want to help their children go to good colleges and Jeff and Mary want to have assets that allow them (Jeff and Mary) live a comfortable retirement. Both are in excellent health and have family histories of long life expectancies. Their retirements (at age 65 or so) could be a period of 20 or more years.

They own their home which has an assessed value of $200,000 and a market value of about $300,000 (as determined by a real estate appraiser based on recent sales of comparable homes in similar neighborhoods.) The mortgage on the home has a balance of $140,000. A review of the Douglas' financial information, bank statements, and other documents shows the following as of 11/1/18:

• 2011 Camry worth about $11,000, with a bank loan balance of $3,000
• 2012 Volvo S60 worth about $15,000, with a bank loan balance of $10,000
• An insurance policy on Jeff's life with a face value of $100,000 and no cash surrender value. Mary is the beneficiary listed on Jeff's policy.
• An insurance policy on Mary's life with a face value of $10,000 and no cash surrender value. Jeff is the beneficiary listed on Mary's policy.
• Credit card balances that total $3,500.
• A savings account with a $1,000 balance.
• Two mutual funds earmarked for the children's college education. The account for Paul has a balance of $10,000 and Marcy's has $11,000 as a current balance. The fund has averaged an 8% annual rate of return over its life.
• 100 shares of Apple Inc. (NASDAQ: stock symbol = AAPL), formerly Apple Computer, Inc. You need to value this stock based on the 11/1/18 price per share. You will need to find that on the Internet.
• 200 Shares of AT&T.
• 150 shares of Twitter.
• A checking account with a balance of $3,000.
• Jeff estimates that their furniture, fixtures etc. in the home are worth about $7,000.
• Jeff and Mary have retirement accounts that have a current market value of approximately $200,000.
• Mary still has an education loan with an outstanding balance of $15,000. It still has seven years left on it.
• A vacation loan of $750 due in 6 months and a home improvement loan of $2,000 due in 2 years (unsecured - not a home equity loan.)
• Jeff wants to finish the basement and he has discussed this at length with Mary. He is getting estimates from contractors based on ideas that both he and Mary have to create a play area for the children and a TV/den for the family. Jeff and Mary love to play ping pong and pool and would love to introduce the children to both "sports." He believes that the project will cost about $30,000 and he is interested in tapping into the home equity.
• Jeff is also an avid baseball fan and is looking at buying a membership to a local baseball/softball facility for both Paul and Marcy. He figures that since he doesn't have any expensive hobbies, it would be fun to get Paul started as a baseball player and Marcy as a softball player. The membership costs and related costs are as follows: $1,500 per year (covers both kids), equipment $500 per year, and team registration and travel costs will be about another $1,000 to $2,000 a year depending on how serious the kids become. Mary is not sure that this is a priority at this point and wants to explore this possibility in more detail.

6. Jeff Douglas believes strongly that they should help fully fund the equivalent of a state university education (4 years) for Paul and Marcy. Both sets of grandparents have volunteered to make a lump sum donation (50/50 spilt) to the mutual funds today. In other words, these generous grandparents have stated that they are willing to pool their funds and make a substantial deposit to support an education fund.

Assuming that today's cost of that type of college education is $25,000 per year and that it will inflate by 4% per year, how much must the grandparents donate to the mutual funds to fully fund these investments (to meet Jeff's goal)? (Assume that Paul and Marcy will start college in 12 and 11 years respectively. You will need to determine the present value of the future college costs. I have put a worksheet at the end of this document that you might find helpful. If you are an Excel user, you can set this up within an Excel worksheet. Here are some steps to follow:

A. First by growing the cost of education by 4% per year (12 years into the future for Paul and 11 years for Marcy) and then calculating the present value of those future cash flows. Keep in mind that Paul will be going to school for 4 years and so too will Marcy. So you will need to figure the future value of the cost of education for the first year, second year, third year, and fourth year - each year 4% more costly than the year before!

B. Calculate the present value of the future costs of education using the investment yield prediction (8% - see below and notice in the data above that the investment fund has averaged 8% per year).

C. Once you have the present value of the future costs - you can subtract the current balance in these accounts to derive the "donation" that the grandparents will need to make.) Assume that the investment will grow at 8% per year as a result of investment yields. How much (in total) must the grandparents invest today to establish the education fund for Paul and Marcy?

1. First step involves growing the cost of education by 4% per year (12 years into the future for Paul and 11 years for Marcy) and then finding the present value of those future costs by assuming an 8% annual return. So here's what you need to do. Set up a table like these for both kids:

(GO TO NEXT PAGE)

Paul's projections

Years (end of year)	Future Value of Education Cost (4%)	Present value of Education Costs (using 8% as the discount rate)
12	$40,026	$15,894.80
13	$41,627	$$15,306.10
14	$43,292	$14,739.21
15	$45,024	$14,193.31
	Total	$60,133.42

Marcy's projections

Years (end of year)	Future Value of Education Cost (4%)	Present value of Education Costs (using 8% as the discount rate)
11
12
13
14
	Total	$

Once you have the present value of the future costs - you can subtract the current balance in the current education accounts to derive the "donation" that the grandparents will need to make.) How much (in total) must the grandparents invest today to establish the education fund for Paul and Marcy? Use the following formula:

Total present value of the education costs less the $21,000 in the current education accounts = the donation that the grandparents will make.