You deposit $300 each month into an account earning 7% interest compounded monthly.

Question

You deposit $300 each month into an account earning 7% interest compounded monthly.

a) How much will you have in the account in 20 years?

b) How much total money will you put into the account?

c) How much total interest will you earn?

Answer 1

You have the monthly rent of an annuity and you have to find the Future value, also called Amount. This can be done by solving a formula, using a spreadsheet function, or a calculator. The calculator is simplest, but you have to understand compound interest and annuity concepts. They are important and you will face them all your life, so it is worth learning this material.

You are dealing with five variables, and you can solve for any one of them if you know the other four. In this problem the variables are:

PV = present value of an ordinary annuity = 0
FV = future value of an ordinary annuity = ?. This is what we have to find.
N = number of periods over which compounding takes place = 20 years x 12 months - 240 months
i% - the compounding interest rate = 7% / 12 = .58333% per month
PMT = the periodic payment (rent) of an ordinary annuity = $300

 

a. The Future Value is $157,189.62

b. Simple! $300 x 240. I'll let you solve this.

 

c. FV - your answer for b.