Question

How much do you need to save to achieve each of the goals you set out and how do you plan on reaching that goal? (i.e Assuming a 2% return on my money, to achieve goal 1 I will need to save $50 bi-weekly for 5 years) **Use reasonable rates of return based on your time horizon and identify how you determined the rate of return to use**

SHOW WORK

Rate of return: I believe my savings account generate 2.3% interest. This is the account I would theoretically use.

Goals:
1) Buy a new car for $3k (10 months) , 2) Go to Las Vegas with $2k (1 year)

Answer 1

We can calculate this using Excel and the concepts of time value of money

(1) To calculate the amount to be saved every two weeks (bi-weekly) to achieve the first goal, we use the PMT function in Excel with the following arguments :

rate = 2.30% / 26 ( we use 26 since the compounding is done every two weeks. Assuming 52 weeks in year, this is equal to 26 periods

nper = number of time periods in the year, which is calculated as (10 months / 12 months) * 26 weeks

pv = 0 as the initial investment is nil

fv = $3,000 which is the goal

We use this Excel function, and thereby calculate the PMT as $137.20

The bi-weekly investment to achieve goal 1 is $137.20

(2) In the same way, we calculate the investment to achieve goal 2

rate = same as above

nper = 26

fv = $2,000 which is the goal

We use the PMT function in Excel, and thereby calculate it as $76.08

The bi-weekly investment to achieve goal 2 is $76.08