Question

1. After reading Elizabeth Warren’s book, All Your Worth, you decide to be very careful about your LARGE purchases and commitments. As a result, you consistently choose a rent rate or a mortgage amount that is $100 less than you “could” afford. You also choose to pay cash for your cars to avoid $400 or more in interest expenses to finance a car purchase. In total, these choices save you $500 per month. How much can you accumulate if you save this $500 per month in an index fund that averages 9% per year for the 45 years you have until retirement? (Assume monthly compounding.)

Answer 1

Annual return on index fund =9%

Monthly return =(9/12)%=0.75%=0.0075

Number of months of savings =45*12=540

Compount Amount Factor (CAF)=(F/A,i,N)=(((1+i)^N)-1)/i

i=Monthly Return =0.75%=0.0075

N=Number of months=540

CAF=(F/A,0.75%,540)=(((1+0.0075)^540)-1)/0.0075=7404.878469

Monthly Savings=$500

Amount accumulated=500*CAF=500*7404.8786469=$3,702,439

Amount accumulated

$3,702,439