How much should you invest each month in order to have $600,000 if your rate of return is 4.8% compounded monthly and you want to achieve your goal in 40 years?

Question

How much should you invest each month in order to have $600,000 if your rate of return is 4.8% compounded monthly and you want to achieve your goal in 40 years?

 

How much interest will you earn?

   

How much should you invest each month in order to have $600,000 if you want to achieve your goal in 20 years

 

If you deposit the amount you need to achieve your goal in 20 years, how much will your savings be worth after 10 years?

Answer 1

You have the future value of an annuity and you have to find the monthly rent. 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 = $600,000

N = number of periods over which compounding takes place = 40 years x 12 months - 480 months

i% - the compounding interest rate = 4.8% / 12 = .4% per month

PMT = the periodic payment (rent) of an ordinary annuity = ?. This is what we want to find.

 

The solution is $412.51

This amount invested every month for 40 years will grow to $600,000

 

How much interest will you earn? Simple! $600,000 less the amount you invested which is 412.51 x 480.  I'll let you solve this.

 

To achieve your goal in 20 years, we only need to change N to 240 and solve for the new PMT. We get $1,4876.79

 

Now that we have PMT for 20 years we can change N to 120 and solve for FV. $229,486.94

 

 

Answer 2

Hello Tracey,

 

Is there any chance that you have a classmate named Jessica? If you search through Wyzant Answers, you'll find this exact same question posted up by a Jessica from Baltimore.

 

One of the best ways to learn is to learn together with your fellow classmates. This might be a good opportunity to reach out and find a study group.

 

Or, you could just find your classmate's question on here and read our answers.

 

Best of luck!