Your Grandmother's Savings Account Gift Calculation

Calculate the Balance in the Savings Account on Your 18th Birthday

Your grandmother has been putting $1,000 into a savings account on every birthday since your first (that is, when you turned one). The account pays an interest rate of 4%. How much money will be in the account on your 18th birthday immediately after your grandmother makes the deposit on that birthday? The amount in the account on the 18th birthday = $25,645.41

Explanation

The investment can be described as an ordinary annuity. An ordinary annuity is a series of equal periodic cash flows that occur for a certain number of years. The amount the investment will accrue principal plus interest is known as the future value of the annuity. It is determined as follows: FV = A × ( (1+r)^n -1 ) / r FV - Future Value, A = $1,000, r = 4% (0.04), n = 18 Calculating FV: FV = $1,000 × ( ( (1+0.04)^(18) - 1 ) / 0.04 FV = $1,000 × 25.64541288 ≈ $25,645.41 The amount in the account on the 18th birthday will be $25,645.41.

To calculate the future balance of the savings account, what formula is used?

The formula used to calculate the future balance of the savings account is the future value of a series formula, which involves compound interest calculations.

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