W3(Rev)_SSG_Annual Salary Increment for Kids Formal Education

PROBLEM DEFINITION

Currently, I have one kid age 4 years old. I have a plan fund his education until 4 years graduated level. Considering that I am an employee, I have to be able to manage my cash flow where no month will be negative.

DEVELOPMENT OF FEASIBLE ALTERNATIVES

I have a plan to utilize 20% of my salary for my kid’s education. To maintain the cash flow still positive, I need to increase my revenue every year, in this case to increase salary constantly. The challenge is how much is the constant salary increment I need in order me able to maintain positive cash flow.

DEVELOPMENT OF OUTCOMES FOR EACH ALTERNATIVE

In order me able to know current education cost, I use cost of each education level that currently available in Jakarta as following;

Table 1. Cost of formal education in Jakarta for private school with middle range of quality.

SELECTION OF CRITERIA

Education Cost increment.

Since, I can’t find the historical data of education cost over past 20 years, I used US education historical datas by modify them as a function of inflation. The equation:

Y = -0.2255 x + 6.1333

Where,

Y = Education increment rate

X = inflation rate

Equation 1. Education is function of inflation rate

Figure 1. US education cost as function of Inflation yearly (%).

The same equation is applied to Indonesian inflation rate to get the education historical increment rate as detail on Table 2. Below.

Table 2. Yearly past education increment rate (%)

Both above yearly inflation rate and education increment rate is extrapolated using “logarithmic” model as best fit. The following is the equation for extrapolation applied:

Y (education) = -7.58 ln(x) + 29.026

Y (inflation) = -1.096 ln(x) +10.634

Where,

Y (education) = extrapolated education increment cost including inflation (%)

Y(inflation) = inflation extrapolated cost (%)

Equation 2. extrapolation of increment of education and inflation rate   e� mn% pD* on 1. Education is function of inflation rate

Figure 2. Extrapolation equation for Yearly Inflation and Tuition

Based on equation 2 above, the extrapolated rate of inflation and education cost can be derived.

By applying the extrapolated inflation rate to salary, and Tuition cost increment, the value of extrapolated of yearly tuition cost, extrapolated Salary Future Value (considering yearly increment and inflation).

Y (education) = -7.58 ln(x) + 29.026

Y (inflation) = -1.096 ln(x) +10.634

Where,

Y (education) = extrapolated education increment cost including inflation (%)

Y(inflation) = inflation extrapolated cost (%)

Equation 2. extrapolation of increment of education and inflation rate

Table 3. Minimum salary increment on yearly basis to manage cash flow postive

ANALYSIS FOR THE ALTERNATIVES

Based on above table, the minimum salary increment (constant) is 11,475% in order the cash flow still positive over the future years.

SELECTION ON THE PREFERRED ALTERNATIVES

The selected alternative does not consider positive variance as an asset for invest or future use.

PERFORMANCE MONITORING AND POST EVALUATION RESULT

In the case of fixed 11.475% salary increment does not achieved, the other option will be to save positive variance to used on the negative variance. This will be later exercise.

REFERENCES

BankIndonesia.(2003). Inflation Report (Consumer Price Index).Access September 27, 2013 from

http://www.bi.go.id/web/en/Moneter/Inflasi/Data+Inflasi/

Trading Economics.(2013).Indonesia Interest Rate.Access September 27, 2013 from

Inflation Worldwidedata.(2013).Historic Inflation Indonesia – CPI Inflation.Access September 27, 2013 from

http://www.inflation.eu/inflation-rates/indonesia/historic-inflation/cpi-inflation-indonesia.aspx

Badan Pusat Statistik (2013).Data Inflasi dan IHK.Access October 1, 2013 from:

Jordan Bowersox, Jonathan Breazeale (2013).Saving for College: Historical and projected Cost. Access October 1, 2013 from:

http://www.aabri.com/manuscripts/10700.pdf

Filed under Sutoyo S, Week 03

4 responses to “W3(Rev)_SSG_Annual Salary Increment for Kids Formal Education”

1. Sorry Pak Sutoyo……. You picked a really GREAT case study but the way you set it up was not done very well…….

The way to set this problem up is to take the annual inflation rate for the past 20 years, then EXTRAPOLATE forward until 2030, NOT using the average but using the “best curve fit”.

Then you need to do the same for the growth in education expense for the last 20 years and EXTRAPOLATE that forward until 2030 using the same method. (What you are likely to find out is the growth in the cost of Education EXCEEDS that of INFLATION)

THEN once you find out what the year on year inflation rate is and the year on year growth in the cost of the schooling, THEN you can figure out the investment necessary to provide sufficient money to educate your kid.

Explained another way, I would expect to see two curves- one showing the extrapolated inflation rate between now and 2030 and the second showing the extrapolated growth rate between now and 2030 in education costs (be prepared for a nasty shock!!!)

THEN once you have those numbers calculated, you can use that information to project how much money you will have to set aside each year to cover the costs of the childs education PLUS set aside enough money to cover University costs.

Here are some references to help you get started-
http://www.fep.up.pt/docentes/moutinho/micro/besanko-ch08.pdf

http://www.huffingtonpost.com/2012/08/15/cost-of-college-degree-increase-12-fold-1120-percent-bloomberg_n_1783700.html

I think what you are going to find is these curves are NOT straight lines but are some form of exponential or polynomial curve…..

Bottom line- GREAT case study but your set up and analysis was not well done. Try again and if you are STUCK, do not hesitate to ask for help on how to use Excel to do curve fitting-

BR,
Dr. PDG, Jakarta

• Sutoyo Saragih

Dear Pak Paul,
Thanks you very much for the input. The way I understand and the challenge that I take is to make calculation where no negative cash flow in yearly basis when I plan to put 20% of my salary to my kid education. In this case, education cost increment has considered the inflation while salary increment has not. As you can see in the column of “h” is(salary+increment) exclude inflation. Tuition fee on column “i” is the Future value of tuition fee including the inflation.
The idea is to find out how much should I increase my salary every year in order there is no negative cash flow in the future.

• My challenge to you is whether your ASSUMPTIONS for inflation are correct or not.

I don’t think they are. I think they are too conservative. You need to go back and come up with a better way to predict inflation into the future. Suggest you use the best fit curve feature in Excel and PROJECT the inflation rate into the future.

I think just common sense (coming from doing your grocery shopping each week) should tell you that the REAL inflation rate is much higher than what the government is claiming it is? I know the US government routinely lies about those numbers- http://www.shadowstats.com/ And I have no reason to believe that the Indonesian government isn’t also manipulating those figures.

So my challenge to you is to find the REAL inflation rate and project the GROWTH of inflation forward into the future……

BR,
Dr. PDG, Jakarta

• Do you really have any control over how much salary you make? I can see you controlling how much salary you set aside or invest but trying to determine how much salary you are going to make doesn’t make any sense to me, from a practical perspective. Supposing you change jobs? Supposing you get fired? Supposing you get promoted and earn more money? There are too many variables beyond your control in terms of calculating what salary you need to make.

BR,
Dr.PDG, Jakarta