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A grandmother wishes to save ₱150,000 for her granddaughters’
nursery education four years from now. How much should she deposit
monthly in a bank if it pays at 6.5% compounded monthly?
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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 the monthly payment (deposit);
1+r is the monthly growth factor; n is the number of deposits (= the number of years multiplied by 12, in this case).
From this formula, you get for the monthly payment
P = . (1)
Under the given conditions, FV = P150,000; r = 0.065/12; n = 4*12. So, according to the formula (1), you get
for the monthly payment
P = = 2744.74.
Answer. The necessary monthly deposit value is P2744.74.
Note that of projected total P150,000, the grandmother deposits only 4*12 times P2744.74,
i.e. 4*12*2744.74 = P 131747.52. The rest is what the account earns/accumulates in 4 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.