Question

if you want to save $50,000 in 5 years for a down payment on a house, how much do you need to save each month in order to accumulate this amount? Assume that you will earn 6% annual interest on your investment account.

Answer 1

The Future Value of annuity regular is calculated by using the following formula

Future Value of Annuity = P x [{(1+ r)ⁿ - 1} / r ]

Where, Future Value = $50,000

Monthly Interest Rate (r) = 0.50% per month (6% / 12 Months)

Number of months (n) = 60 Months (5 Years x 12 Months)

Monthly Savings (P) = ?

Future Value of Annuity = P x [{(1+ r)ⁿ - 1} / r ]

$50,000 = P x [{(1 + 0.0050)⁶⁰ – 1} / 0.0050]

$50,000 = P x [(1.34885 – 1) / 0.0050]

$50,000 = P x [2.34885 / 0.005]

$50,000 = P x 69.77003

P = $50,000 / 69.77003

P = $716.64 per month

“Therefore, you need to save $716.64 each month in order to accumulate this amount of $50,000 at end of 5^th year”