Question

Parents wish to have $110,000 available for a child's education. If the child is now 2 years old, how much money must be set aside at 5% compounded semiannually to meet their financial goal when the child is 189 The amount that should be set aside is $49915 (Round up to the nearest dollar)

Answer 1

The question involves calculating the amount of money that should be invested at a 5% semiannual compounding rate to reach $110,000 by the time a child turns 18.

Step-by-step explanation:

Understanding Compound Interest for Educational Savings

The scenario presented involves calculating the present value needed to achieve a future financial goal for a child's education, using the concept of compound interest. Given a future value of $110,000, a compounding rate of 5% semiannually, and a time frame until the child turns 18 years old, we must work backwards to find the present value necessary. The time period in this case is 16 years (from age 2 to 18).

Using the compound interest formula, we can calculate the amount that should be set aside today. It is also noted that $49,915 is the rounded amount that should be initially invested.

The example of a $3,000 investment at an annual rate of return of 7% growing fifteen-fold over 40 years illustrates the powerful effect of compound interest over time. This principle can be applied to saving for retirement, educational goals, or any long-term financial planning. The importance of starting early and allowing interest to compound is a key facet of successful financial growth strategies.