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Analyzing and comparing the given savings strategies

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Monica and her friend Linda each believe they have a superior savings plan. Monica saved $4,500 at the end of each year for 15 years and then let her money grow for 30 years. Linda did not begin saving until 15 years later, at which time she began to save $4,500 at the end of each year for 30 years. They both earned 6% on their investments and are 65 years old today and ready to retire. Which of the following statements is correct?

A. Both strategies are equal as they have equal account balances today.
B. Monica's strategy is better because she has a greater account balance today.
C. Linda's strategy is better because she has a greater account balance today.
D. Neither strategy is better because Linda has a greater account balance, but Monica contributed less.

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Solution Summary

Solution compares the saving strategies in both the cases and selects the correct option.

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Case I- Monica's Strategy
Number of deposits=n=15
Periodic deposit amount=R=$4500
Interest rate=i=6%
Value of Monica's savings before 15 years=(R/i)*((1+i)^n-1)
...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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