Question

Your annual living expenses are $25,000. Assuming that your spending habits don’t change over the next 20 years, and the inflation rate would be 4% per year for that 20 year period, what will be your living expenses 20 years from now? The purpose of this problem is to help you appreciate how large an effect inflation can have over a long period of time, even at a low rate of 4%,. This is compounding working against you for sure – yes?

Answer 1

HI

Here

Current living expense P =$25000

time t = 20 years

rate = 4%

so expenses after 20 years can be calculated by compounded interest formula

F=P*(1+r)^t

F = 25000*(1+4%)^20

F = $54,778.08

Hence after 20 years your expenses will be $54,778.08

Thanks