To calculate the amount you would need to deposit today to have $20,000 in 5 years, assuming your money will earn a 4% interest rate, you can use the formula for compound interest. Here are the steps to find the deposit amount:
1. Identify the variables:
- Principal amount (P): the deposit you need to make today
- Future value (FV): $20,000
- Interest rate per period (r): 4% or 0.04
- Number of periods (n): 5 years
2. Use the compound interest formula:
FV = P * (1 + r)^n
3. Rearrange the formula to solve for P:
P = FV / (1 + r)^n
4. Substitute the given values:
P = $20,000 / (1 + 0.04)^5
5. Calculate:
P = $20,000 / (1.04)^5
P ≈ $16,411.56
Therefore, you would need to deposit approximately $16,411.56 today to have $20,000 for a down payment on a house in 5 years, assuming a 4% interest rate.