Question

Hollie needs a new car in five years. She prefers to pay cash as opposed to financing the car. Assuming she can earn 2 percent on her savings account and will need $25,000 in five years, how much does she need to save per month?

N	I/Y	PV	PMT	FV

Answer 1

We are assuming that 2% is annual interest rate and interest rate is compounded annually.

In this case, she needs to save $25,000 over five years earning 5% interest rate.

This is case of annuity in which we need to calculate annual payment.

Future value of annuity = P * (((1 + r)ⁿ - 1) / r)

where P is annual payment, r is interest rate and n is number of periods

In this case, r = 2%, n = 5, FV = $25,000 and we have to calculate P

Now putting these value in the equation

25000 = P*(((1 + 0.02)⁵ - 1) / 0.02)

25000*0.02 = P*(((1 + 0.02)⁵ - 1)

500 = P*(1.104-1)

P = 500/0.104 = 4803.96

This is annual payment

So she needs to save monthly = 4803.96/12 = $400.33

So she should save $400.33 per month to save $25,000 in five years.