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Savings Plan Examples

Before going through these examples, you might want to read the section on how to use a calculator.

Example 1

A Christmas Club account earns 4.2% compounded monthly. $100 is deposited into this account at the end of every month for one year.  What is the future value and how much interest is earned?

M = 100
r = 0.042
ppy = 12
i = r/ppy = 0.042/12 = 0.0035
t = 1
n = t * ppy = 1 * 12 = 12
A = ?
I = ?

Savings Example 1    Calculator Solution

Notice that these results agree with the results found in the table in the main text.

 

Example 2

Consider a retirement account paying 6% compounded monthly. $50 is deposited into this account every month for 40 years. What is the future value and how much interest will be earned?

M = 50
r = 0.06
ppy = 12
i = r/ppy = 0.06/12 = 0.005
t = 40
n = t * ppy = 40 * 12 = 480
A = ?
I = ?

Savings Example 2    Calculator Solution

These results illustrate the benefits of establishing a savings plan early in life. Notice in particular that the total amount of money deposited into the account is only 50*480 = $24,000. More than three times this amount was earned in interest.

 

Example 3

MMU set up a savings account to pay for upgrading their computer technology in three years. The account pays 5% compounded quarterly. How much should they deposit at the end of each quarter if their goal is to have $200,000 in the account at the end of the third year? How much interest will be earned?

M = ?
r = 0.05
ppy = 4
i = r/ppy = 0.05/4 = 0.0125
t = 3
n = t * ppy = 3 * 4 = 12
A = 200,000
I = ?

Savings Example 3    Calculator Solution

 

Example 4

Prepare a table showing the growth in the savings account for the problem in the previous example. Create a graph illustrating this growth.

Savings Example Table

Savings Example Graph