I’m investing 6% of my monthly salary into a savings account with a monthly interest rate...

I’m investing 6% of my monthly salary into a savings account with a monthly interest rate of 0.67%, the interest compounds monthly. How much will the savings account be worth after 10 years if I make an annual salary of $62,000 dollars and expect an annual salary increase of 1.5%?

Expert Solution

Monthly interest rate = 0.67%

Number of times compounding in a year = 12 (monthly basis)

Monthly compounded Annual interest rate = (1+ monthly interest rate)^(number of time compounding in a year) -1

= (1+0.67%)^12 -1

= 1.08343 -1

Effective annual interest rate = 8.343%

Current salary = $62,000 (1.5% increment every year)

Savings every year = 6% of the salary in that year

Total savings at the end of 10th year = $62,899

Spreadsheet calculation:

Years	Annual salary (1.5% increase pa)	Savings (6% of salary)	Annual effective interest rate	Cumulative saving amount at the of year
1	62,000	3,720	8.343%	4,030
2	62,930	3,776	8.343%	8,457
3	63,874	3,832	8.343%	13,315
4	64,832	3,890	8.343%	18,641
5	65,805	3,948	8.343%	24,473
6	66,792	4,007	8.343%	30,857
7	67,793	4,068	8.343%	37,838
8	68,810	4,129	8.343%	45,468
9	69,843	4,191	8.343%	53,802
10	70,890	4,253	8.343%	62,899

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I’m investing 6% of my monthly salary into a savings account with a monthly interest rate...

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