Question

You invest your birthday money in a savings account for at 6.5% interest compounded annually. How do you determine how much birthday money you need to invest to have $350 after 5 years?

Answer 1

To end up with `$350` after `5` years of `6.5%` interest, you need to invest a lump sum of about `$255.47`

Explanation:

`6.5%` annual interest is equivalent to multiplying the investment by `1.065` each year.

So if you invest an initial lump sum `d`, then after `5` years it will be worth `d xx 1.065^5 ~= d xx 1.37`.

So to end up with `$350` you need to invest `($350)/1.37 ~= $255.47`