Question

Assume that your parents wanted to have $ 140 comma 000$140,000 saved for college by your 18th birthday and they started saving on your first birthday. They saved the same amount each year on your birthday and earned 12.5 %12.5% per year on their investments.
a. How much would they have to save each year to reach their​ goal?
b. If they think you will take five years instead of four to graduate and decide to have $ 180 comma 000$180,000 saved just in​ case, how much would they have to save each year to reach their new​ goal?

Answer 1

I will use the formula for the future value of an annuity

where FV is the future value, PMT is the payment amount, r is the interest rate, and n is the number of periods.
a. To find out how much your parents would have to save each year to reach their goal of $140,000 by your 18th birthday, we can plug in the given values into the formula and solve for PMT

Therefore, your parents would have to save $2,304.67 each year to reach their goal.
b. To find out how much your parents would have to save each year to reach their new goal of $180,000 by your 18th birthday, we can use the same formula and solve for PMT

Therefore, your parents would have to save $2,945.96 each year to reach their new goal.