Question

A person wants to put aside $500 at the beginning of each month for 10 years. At an interest rate of 6.0%, what will be her savings account balance in 10 years?

Answer 1

The amount is computed as shown below:

Future value = Monthly payment x [ [ (1 + r)ⁿ – 1 ] / r ]

r is computed as follows:

= 6% / 12 (Since the deposits are on monthly basis, hence divided by 12)

= 0.5% or 0.005

n is computed as follows:

= 10 x 12 (Since the deposits are on monthly basis, hence multiplied by 12)

= 120

So, the amount will be as follows:

= $ 500 x [ [ (1 + 0.005)¹²⁰ - 1 ] / 0.005 ]

= $ 500 x 163.8793468

= $ 81,939.6734

Now since the deposits are at the beginning of each month, hence we need to multiply the above rate by (1 + r)

So, the amount will be as follows:

= $ 81,939.6734 x 1.005

= $ 82,349.37 Approximately

Feel free to ask in case of any query relating to this question