What sum would they deposit monthly throughout 10 years?

Question

Mark and Kate are establishing a fund for their son's college education. What lump sum must they deposit in an account that gives 6% annual interest rate, compounded monthly, in order for them to have $65,000 in the fund at the end of 10 years?

Answer 1

A single deposit with compound interest follows the formula:

 

A = A₀ (1 + r/n)^nt

 

where A₀ is the initial deposit, A is the final amount ($65,000), t is time (10 yrs), r is the interest rate (6% or 0.06), and n is the number of times interest is compounded yearly (monthly = 12). Make sure you simplify inside the parentheses before applying the exponent, and don't round too much from your calculator's value in intermediate steps while solving.