Suppose your current salary is $ 5 0,000a year and it will grow 5% a year. If yo

Question

Suppose your current salary is $50,000a year and it will grow 5% a year. If you save 6% of salary at theend of every year and earn 8% return a year, how much would youhave in 40 years? Please help me go about solving this problem. I have no ideawhere to being. Thanks! Suppose your current salary is $50,000a year and it will grow 5% a year. If you save 6% of salary at theend of every year and earn 8% return a year, how much would youhave in 40 years? Please help me go about solving this problem. I have no ideawhere to being. Thanks!

Explanation / Answer

In year 1 you earn $50K and you save 6% of it, so your savings are50 * 6/100 = $3K Your return on savings is 8% so your capital increases by $3K *8/100 = $240. As a piece of algebra and ignoring the rise for next year we canexpress this as $Saved = 0.06S(1+R/100) Where S = salary for the year, R = return on savings. or 0.06*50(1+0.08) thousand dollars. In year 2 the return is 0.06*(50 +(50*I)) * (0.06S(1+R/100) And so on. You need to use the compound interest formula to calculate thegrowth of the salary, using 5% per annum compounded. Do thisfirst. Then calculate 6% of of that total. That will give you the amountof salary saved. You get an 8% return on the average value, so take the total amountof salary saved, divide it by two - now you have the average savedmoney - and multiply by 8% to get the total return over 40years. I believe that's it but it might be wise to simply bung the figuresinto Excel and check to see if they come out the same.

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