Have to use a financial calculator but I don't have one... Can anyone help?

Question

your mother just won $250,000 for splitting a Nobel prize with three coworkers. If she invests her prize money in a diversified equity  portfolio returning 8 percent per year, approximately how long will it take her to become a millionaire, before accounting for taxes?

Answer 1

Sofia, you don't really need a financial calculator to solve these problems.

 

Remember

F = P (1+i)^t

 

F = future value = 1000000

P = principal or present value = 250000

i = interest rate = 8% = 0.08

t = # years

 

1000000 = 250000 (1.08)^t

4 = 1.08^t

 

ln 4 = t ln1.08

 

  ln 4

-------- = t

ln 1.08

 

t = 18.013 ≅ 18 years

 

There's also the rule of 72 which approximates the amount of time it takes an investments to double based on the interest rate.

 

72 / 8 = 9, where 8 is the interest rate, expressed as a whole number and 9 is the number of years it takes that investment to double.

 

In our case we want the investment to quadruple, i.e. double twice.  So the length of time needed to get to $1 million is

9 x 2 - 18.