Question

How much would you need to deposit in an account each month in order to have $30,000 in the account in 6 years? Assume the account earns 8% annual interest compounded monthly.

Answer 1

Compute the monthly rate using the equation as shown below:

Monthly rate = Annual rate / Compounding per year

= 8% / 4

= 2%

Hence, the monthly rate is 2%.

Compute the period using the equation as shown below:

Period = Number of years * Compounding per year

= 6 * 4

= 24

Compute the FVIFA at 2% and 24 periods, using the equation as shown below:

FVIFA = {(1 + Rate)Number of periods - 1}/ Rate

                   = { (1 + 2%)24 - 1}/ 2%

            = 30.42186247

Hence, the FVIFA at 2% and 24 period is 30.42186247.

Let the amount deposited be x.

Compute the amount deposited using the equation as shown below:

x * FVIFARate, Period = Future Value

x * FVIFA 2%, 24 = $30,000

x * 30.42186247 = $30,000

x = $30,000 / 30.42186247

x = $986.1329177

Hence, the amount that should be deposited is $986.1329177.