Future value

[Illeana]

One of your friends had a baby this year and are asking for advice, as they would like to invest a lump sum today so the child would not have to ever invest money for a retirement plan (assume retirement is age 65). If they had $35,000 in savings and it was earning 7%, how much will this amount to? How much of difference would there be if they had $50,000 instead?

I am having trouble understanding the question. Her current age is not given, I only know the retirement age, so what do I put in for 'n' in the future value formula?

This is what I have till now,

35000(1.07)=37,450 so she would get 2,450 in the first year if she made 7% on that money. But the next year she would make 7% of 37450 which would be 40,071.5 So she would be making 2600 that year.

 

[Ishuda]

If the baby is just born and is going to retire at 65, the period is 65. You started correctly but just stopped too soon: The amount of money available after
1 year = P * (1.07)¹
2 years = P * (1.07)²
3 years = P * (1.07)³
...
65 years = P * (1.07)⁶⁵
where P is what you started with (the principal)

There are formulas you need to memorize and this one, future value for a lump sum, is
FV = P (1+i)ⁿ
where FV is future value, P is principal lump sum paid initially, and n is the term or number of years the investment will grow. Other formulas apply when periodic payments are made, etc.