You just started a retirement fund by depositing $7,000 in an account. The annual interest rate for an account with an "early withdrawal" penalty is 5.75%. How much money will you have in your account if you leave it for 2 years?
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Detailed Explanation
Compute the amount of the fund after the 1st year:
7402.50
Compute the amount of the fund after the 2nd year:
Amount of fund:
7402.50 (1.0575) = 7828.14
The amount of the retirement fund after 2 years is 7,828.14
TIP: For computing the fund involving a higher number of years, such as 20 years, you cannot use this method because it will be very time-consuming. Instead, use the formula:
where A stands for the final amount, P stands for principal (or initial amount), r is the rate (as a percent), and t is time (in years).
Amount of fund in 2 years:
7402.50
Compute the amount of the fund after the 2nd year:
Amount of fund:
7402.50 (1.0575) = 7828.14
The amount of the retirement fund after 2 years is 7,828.14
TIP: For computing the fund involving a higher number of years, such as 20 years, you cannot use this method because it will be very time-consuming. Instead, use the formula:
where A stands for the final amount, P stands for principal (or initial amount), r is the rate (as a percent), and t is time (in years).
Amount of fund in 2 years:
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