Q. I have a son starting college in three years and another that will be going in nine years. How can I determine how much I will need to save to cover college costs at a state college for both children?
A. First, try to determine what the cost of sending your sons to college will be. There are some guidebooks you can purchase that list various college costs. (For example, for the 1989-90 college year, tuition at the University of Maryland at College Park cost $2,270 for state residents, while room and board came to $4,329 and books another $500 for a total of $7099, according to "The Right College," published by the College Research Group of Concord, Ma.)
To project current costs into the future, you need to take inflation into account. According to the College Board, average college costs have been rising 8 percent a year.
MML Investors Services, the broker/dealer associated with Massachusetts Mutual Life Insurance, has come out with an easy-to-use college funding planner. According to their worksheet, you would have to multiply a current college cost of $7,000 by an inflation factor of 1.26 to come up with a cost of $8,800 a year for your child who is starting college in three years.
For the child with nine years to go before college, multiply $7,000 by 2.0 to get a cost of $14,000 a year when he enrolls.
Then take those costs and multiply by four, to get the total bill for a four-year education.
MML's planner next goes on to help you determine how much you need to set aside today to meet future college costs, assuming different rates of return on your investment.
One of your biggest obstacles will be the short amount of time available to you to save up money for your older son's college venture. With only three years to go, you would need a lump sum now of $28,000, getting an 8 percent return, to cover the $35,000 cost of his education.
The $56,000 cost of your younger son's education also will require a lump sum today of $28,000 because you have more years for your money to work for you. If you saved for him on a monthly basis, you need to put away $345 a month, assuming an 8 percent return.
Q. I was reading an investment newsletter that refers to "free cash flow yield" and its importance as a tool in picking stocks to buy. Can you give a definition of that term.
A. To understand "free cash flow yield" you first need a definition of free cash flow. Basically, free cash flow is the amount of profit available to a company after its expenditures for plant and equipment.
The exact definition is profits plus depreciation added back in, minus capital expenditures.
Free cash flow is important because it shows how much money is available to pay dividends and make acquisitions or pay off debt.
Free cash flow yield refers to how high the company's dividend yield would be if all the spare cash went to pay dividends.
Companies with strong cash flow are financially very healthy and, as a bonus, make good acquisition targets themselves because of their ability to repay debt.