1. Growing your money
In this video, we will talk about how to use some of Sheets' other financial functions, pmt() and nper() to go along with fv() learned in the last lesson.
2. What is an annuity?
Annuities, simply, are accounts that involve a series of payments. Examples might include insurance payments, pension payments, and investments.
3. Save for college
Let's say you decide to start a college fund for your child to help pay for their expenses. The average cost per year is around ten thousand dollars, and you should probably save more to cover inflation. The pmt() or payment function can help you determine how much you would need to pay into an investment each year to save the amount desired.
4. Use the pmt() function
The pmt() function has four arguments that we are going to use. First is the interest rate, which is shown in cell B5. Next, we include the number of payments, which we will calculate by including the number of years you wish to save for 18 years. The present value is then included, and since this would represent money we already have, it would be a negative value, as it would subtract from the future value we are trying to attain. Last, we include the future value or total we are trying to save.
You can see that you would need to save 1,900 dollars a year over the 18 years to adequately save 60,000 dollars for the college fund.
5. Use the nper() function
Once you have saved the money, how much can you withdraw yearly? The nper() function allows you to calculate the number of withdrawals you can make on the present value of the annuity you've paid into. You fill in the interest rate, the amount you wish to withdraw each year called the payment amount, and the present value of the investment.
As with the pmt() function, we used a negative present value. You could use a positive value; however, then you would want to use a negative payment amount since you are withdrawing money. It is fairly common to always treat present value as a negative number across the financial functions, as we also used a negative in the fv() function in the last exercises.
Next, you can include the future value, or how much money you want at the end of the withdrawals. Here we can see that we can make four full withdrawals to cover college costs at 15,000 dollars a year with a partial payment for the last year.
6. Try it on your own!
Let's practice using the pmt() and nper() functions.