Question

How much money does Ted need to invest each month in order to accumulate $10,000 over a five-year period, if he expects to get a return of 5.625% per year?

Answer 1

The amount needs to be invested each month in order to accumulate $10,000 over a five-year period is calculated by using the Future Value of an Ordinary Annuity formula

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

Future Value = $10,000

Monthly Interest Rate (r) = 0.46875% per month [5.625% / 12 Months]

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

Monthly Payment (P) = ?

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

$10,000 = P x [(1 + 0.0046875)⁶⁰ - 1} / 0.0046875]

$10,000 = P x [(1.323914 – 1) / 0.0046875]

$10,000 = P x [0.323914 / 0.0046875]

$10,000 = P x 69.1017584

P = $10,000 / 69.1017584

P = $144.71 per month

“Therefore, Ted need to invest $144.71 in each month in order to accumulate $10,000 over a five-year period, if he expects to get a return of 5.625% per year”