Question

Sandy plans to save $163.50 a month for the next 2 years, so she can buy a $20,000 car with a 20% down payment. Although she has a higher risk tolerance, she is only earning 2% APY in her savings account. For this plan to work, what does she need to accomplish?

A) Increase her risk tolerance
B) Find a higher-yield savings account
C) Save a larger monthly amount
D) Adjust her down payment percentage

Answer 1

Sandy should either find a higher-yield savings account, save a larger monthly amount, or adjust her down payment percentage to meet her goal of saving for a $4,000 down payment on a $20,000 car. Increasing her risk tolerance is not applicable as she already has a high risk tolerance. The most straightforward solution is to save a larger monthly amount.

Step-by-step explanation:

To determine what Sandy needs to accomplish in order to buy a $20,000 car with a 20% down payment, let's first calculate the total amount she needs for the down payment. Twenty percent of $20,000 is $4,000. If she saves $163.50 monthly over 24 months (2 years), she will have saved $163.50 × 24 = $3,924, which is just short of the required $4,000 down payment. Since Sandy is earning a 2% APY on her savings account, the compound interest will not likely bridge this gap significantly.

Given these calculations, Sandy has a few options to ensure she has the required down payment:

• Option B is to Find a higher-yield savings account, but this may not generate the necessary funds quickly enough given the modest difference in interest rates available for savings accounts.
• Option C is to Save a larger monthly amount, which is the most straightforward solution to meet her goal.
• Option D is to Adjust her down payment percentage. She might negotiate a lower down payment, but as discussed in the reference materials, lower down payments can have other costs, such as mortgage insurance for homes, and possibly similar costs for cars.

As she has a higher risk tolerance, Option A to Increase her risk tolerance is not applicable. Sandy should therefore consider options B, C, and D to accomplish her goal of saving for the car's down payment.

Answer 2

To buy a $20,000 car with a 20% down payment, Sandy must save a larger monthly amount than $163.50 over 2 years, as the current saving plan brings her just short of the required $4,000, even with interest from a 2% APY savings account.

Step-by-step explanation:

Sandy plans to save $163.50 a month for the next 2 years to make a 20% down payment on a $20,000 car. With a 2% APY in her savings account, she will accumulate a total of:
Monthly savings × months + interest
$163.50 × 24 months = $3,924

The interest on her savings will add a small amount to this sum, but it won't be significant enough to reach the 20% down payment required for the car, which is:
20% of $20,000 = $4,000

Sandy's savings of $3,924 is just short of the $4,000 needed for the down payment, not accounting for the interest, which would be minimal at 2% APY. Therefore, for Sandy's plan to work, she would need to save a larger monthly amount (Option C) to reach the $4,000 down payment required. While finding a higher-yield savings account could help grow her savings faster, it is unlikely that savings account yields would increase sufficiently to make up the shortfall within 2 years. This option is not mentioned in the provided details as a viable alternative in this context.