2. Time Value of Money

You have been renting and decided you would like to purchase a home 3 years from now. You plan to save up a $16,000 down payment and $5,000 to cover closing costs. To help you reach your savings goal, you plan to keep your funds in a low-risk investment account earning an annual rate of 5% per year. How much do you need to save each year to meet your savings goal?

PV: $0 (assuming we are starting from scratch)

Rate: 5%

PMT:leave this blank because this is what you are solving for

Periods: 3

FV: $21,000

Note:Because we are using an annual rate and compounding annually, you'll need to change the compounding period on the online calculator to annual instead of monthly.

After you solve for payment, answer the following.Your friend says, okay if you want to save $21,000 in 3 years, you need to save $7,000 per year. Why is the answer you calculated less than $7,000?