Suppose you want to buy a car and have decided that you can save $100 a month. How much money will you have saved in a year’s time? How much will be interest?

Question

Suppose you want to buy a car and have decided that you can save $100 a month. Using information from an internet source, determine the current interest rate on savings accounts and use the information to answer the following:

How much money will you have saved in a year’s time?
How much will be interest?

Answer 1

The current interest rate on savings accounts ranges from about .4% to 1%. It does not matter which interest rate you use as long as you know how to find the answer. Let's assume that you can earn 1% interest per year. In that case you start depositing $100 per month, and the first month you will earn

 

1. 100 + 100*.0008333 = $100.08333

 

In the second month you will have

 

2. (100 + 100.08333) + 200.08333* .08333 = 200.25

3. (100.25 + 200.25) + 300.25*.08 = $300.50

4. and so on.

 

What you have here is an ordinary annuity of $100 whose amount (future value) you have to find. You can look up the formula for the future value of an ordinary annuity and solve for FV, or you can use a financial calculator or a spreadsheet function with the following inputs:

 

PV = 0

PMT = 100

N = 12 months

i% = 1%/12 = .083333%

FV = ?

 

The answer is $1,206.52