Finite Math For Dummies
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A big part of finite math involves working through financial problems. Some of these problems may seem complex—like calculating the monthly deposits required to maintain a sinking fund. Fortunately, there’s a special formula you can use to find the answer.

A sinking fund is usually used to accumulate money to fund a future expense or a way to retire a debt. You can use a sinking fund to pay off a loan in one lump sum at the end of a set amount of time while making just interest payments in the meantime.

For example, a friend borrows $10,000 to purchase a boat and agrees to pay the full amount back in one payment, ten years from now. In the meantime, he agrees to pay interest monthly on the $10,000 at an annual rate of 12%. He also sets up a sinking fund to accumulate the lump-sum payment. The sinking fund earns 9% interest, compounded monthly. How much does he pay monthly? The monthly amount is both the interest to the lender and a deposit into the sinking fund.

The interest to the lender is based on an annual rate of 12%. Using the simple interest formula, I = Prt, you have I = 10,000(0.12)(1) = 1,200 per year. Because he plans to make monthly payments, you divide by 12 so $100 per month goes for the interest payments.

Next, you compute the amount to be deposited in the sinking fund each month.

The formula for a sinking fund payment is


where P is the amount of the payment, A is the amount to be accumulated, i is the interest rate per time period, and n is the number of time periods.

Using the formula to determine the monthly payment into the sinking fund, the amount, A, is $10,000, and the interest per pay period is 9% divided by 12, because it’s compounded monthly. The number of time periods over the ten years is 120


So, the monthly payment into the sinking fund is about $51.68. Add that to the interest payments, and the monthly commitment is $151.68. In ten years, the monthly payments will end.

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Mary Jane Sterling is the author of Algebra I For Dummies, Algebra Workbook For Dummies, and many other For Dummies books. She taught at Bradley University in Peoria, Illinois for more than 30 years, teaching algebra, business calculus, geometry, and finite mathematics.

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