Question

Sophia knows that she needs $42,000 for a 20% down payment on a house she can afford. She found an investment that earns 2.25% interest compounding monthly. How much should she put in the account now, rounded to the nearest dollar, to ensure she has the down payment amount in 5 years?

Answer 1

Compounding interest formula

\[A = A _{0} ( 1 + r)^{t}\]

Here,

A = Final Amount
A0 = Initial Amount
r = rate of interest
t = time period

A = 42,000
A0 = ? ( What we need to find)
r = 2.25% = .0225
t = 60 months (Here the interest is compounded monthly . So we have to consider the period in no. of months. So 5 x 12 = 60)

Now substitute the values in the formula and find A0.