Question

You have a​ $7,000 balance on your car loan at​ 11% interest. Your favorite aunt has just left you​ $10,000 in her will. You decided to pay off the car loan and invest the difference. Now you no longer have a​ $350 per month car payment.

Suggest some ways you might use these additional funds. It would be wise​ to:

Answer 1

It would be wise​ to invest in an Annuity with monthly payment of $350.

Step-by-step explanation:

You no longer have a​ $350 per month car payment; and you used to live well without this $350. So it's the best to use this $350 for an invesment.

Annuity is a financial reserved for retirement. Assuming you will be retired in 10 years. Then you invest in an annuity now with:

current rate: 6% ~ monthly rate 0.5%,

Monthly payment of $350 (PMT)

Tenor: 10 years (NPer = 120)

you will have a future value in 10 years as below:

In excel, FV(rate,Nper,PMT) = FV(0.5%,120.350) = $57,538

Then when you're retired, you invest full $57,538 in an retirement annuity to receive a monthly amount for living expenses. Assuming the key factors as below:

Monthly rate: 0.5%

Tenor: 25 years ~ 300 months

PV: $57,538

The monthly amount to be received is PMT(rate,Nper,PV)= PMT(0.5%.300,$57,538) = $370

You will receive about $370 for 25 years in every month of 25 years in retirement.