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How much must you deposit at the end of each of the next 12 years in a savings account paying 10% annually
in order to have $1 million saved by the end of those 12 years?
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It is a classic Ordinary Annuity saving plan. The general formula is
FV = ,
where FV is the future value of the account; P is annual payment (deposit); r is the annual percentage yield presented as a decimal;
n is the number of deposits (= the number of years, in this case).
From this formula, you get for for the annual payment
P = . (1)
Under the given conditions, FV = $1,000,000; r = 0.1; n = 12. So, according to the formula (1), you get for the annual payment
P = = $46,763.32.
Answer. The necessary annual deposit value is $46,763.32.
Note that of projected $1,000,000 the total, you will deposits only 10 times $46,763.32, i.e. 10*46,763.32 = 467633.2 dollars.
The rest is what the account will earn/accumulate/accrue in 10 years.
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On Ordinary Annuity saving plans, see the lessons
- Ordinary Annuity saving plans and geometric progressions
- Solved problems on Ordinary Annuity saving plans
in this site.
The lessons contain EVERYTHING you need to know about this subject, in clear and compact form.
When you learn from these lessons, you will be able to do similar calculations in semi-automatic mode.