what equivalent amount can be invested at the beginning of each month instead of at the end of each month if interest is 12% per year compounded monthly

Question

what equivalent amount can be invested at the beginning of each month instead of at the end of each month if interest is 12% per year compounded monthly

Answer 1

Hi Erin,

When you invest at the beginning of a month, you earn interest during the month, whereas when you invest at the end of the month, you only earn interest in subsequent months (since the month is over by the time you invest).

In this particular problem, you need to set the amount you invest at the end of the month equal to the amount you invest at the beginning of the month plus the interest you would earn by investing at the beginning of the month.

If you contribute $1,000 at the beginning of the month, you will earn 1% interest for the month (12% annual rate divided by 12 months). That means your balance at the end of the month would be $1,010. Thus, you would have to contribute $1,010 at the end of the month to have an equivalent ending balance.