1. I want to be able to buy a car with cash in 4 years. I have $10,000 that I can invest today. I can get a bond earning 4%. How much will I have for the purchase?
2. I want to buy a house in 5 years. I need to have a down payment of $50,000. How much do I need to have today in order to have the down payment, if I can earn 5%?
3. I just graduated from school with $25,000 worth of debt. I want to know what my monthly payment is going to be. I was able to finance it over 10 years at 2%.
4. I have a standard 30-year mortgage and want to pay off my mortgage early. My loan is for $200,000 at 4.5%. How many months would it take me to pay it off, if I paid $1,200 every month?
5. I want to have $50,000 for my daughter's college in 18 years. If I can afford to put away $1000 a year, what interest rate would I need to get?
Bonus Question: Take oneof your goals and use time value of money with it. You need to include your goal and inputs. For example, oneof my goals is to buy furniture in 12 months and it will cost me $1,000. You need to find out how much you can earn on your money and how much you need today or how much you need to put away each month. Therefore, I could say that the interest rate is 2% and the time frame is 12 months. My FV is $1,000 and I would be solving for PMT in this situation.
Hints
- When it is monthly, you need to change the setting to 12 payments per year on the calculator and divide the interest by 12 if you are using Excel.
- If you are paying out for a payment or the present value (most of the time you will be using PV), then you need to enter it as a negative number.
- Try to estimate what you think it will be before completing the mathematical equation. If you are getting a car payment of $1,000, then you probably entered something wrong.
- Always clear out the calculator after each problem (2nd FV).