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?

1 Answer
Jun 22, 2015

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#