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In order to accumulate enough money for a down payment on a house, a couple deposits
$245 per month into an account paying 3 % compounded monthly. If payments are made
at the end of each period, how much money will be in the account in 7 years?
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It is a classic Ordinary Annuity saving plan. The general formula is
FV = , (1)
where FV is the future value of the account; P is your monthly payment (deposit);
r is the monthly percentage yield presented as a decimal;
n is the number of deposits (= the number of years multiplied by 12, in this case).
Under the given conditions, P = 245; r = 0.03/12; n = 12*7 = 84.
So, according to the formula (1), the couple will get at the end of the 7-th year
FV = = = 22868.77.
Round it to the closest dollar, get the ANSWER: In 7 years, about 22,869 dollars will be in the account.
Note that the couple deposits only 12*7*$245 = $20,580. The rest is what the account earns/accumulates in 7 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
- Find future value of an Ordinary Annuity
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.