Question

Miriam Ramos has saved $12,000 towards a down payment on a new house. She wants to have a total of $40,000 and plans to buy in 5 years. How much will she have to save at the beginning of each month if she can earn 2.5% on her savings?

• $413.59

• $412.73

• $839.53

• $837.78

Answer 1

Answer : $412.73

Explanation :

Total Savings required after 5 years = $40,000

Rate of earnings on Interest = 2.5%

Monthly Rate of Interest = 2.5% / 12 i.e. 0.2083%

Initial Savings for down payment = $12,000

Now the equation is

Total Savings required after 5 years = Value of Initial Savings after 5 years + Value of monthly Savings after 5 years

Value of initial Savings after 5 years = Initial savings for down payment * Compounding factor for 60 months (Refer image)

= $12,000 * 1.133

= $13,596.01

Value of monthly savings after 5 years = Monthly Savings * Cumulative compounding factor of 60 months (Refer image)

= Monthly Savings * 63.97353962

Now put the values in equation

$40,000 = $13,596.01 + (Monthly Savings * 63.97353962)

Monthly Savings = ($40,000 - $13,596.01) / 63.97353962

Monthly Savings = $412.73

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