Can You Build a Downpayment for a House in 5 Years?

Suppose you decided to rent for a while and you sold your house receiving a large lump sum. Suppose you also wanted to build you savings for a while to purchase another house down the road in, say 5 years. How much could you expect to save or grow your money?

For the short term, you want to protect your money as well as grow it. If you put down $100,000 and contributed $120 monthly for 5 years, you would use the following formula to calculate your growth.

P*(1+r)^y + sum_{n=0}^{y*12-1} M*(1+r)^(y-n/12)

where P is the original amount, r is the rate, y is the number of years and M is the monthly contribution.

You can use Javascript to calculate the growth: see sizustech.blogspot.com for code.

Based on this formula, the orginal amount of $100,000 would grow to $127,628 and the monthly contributions of $120 would add $8,170 which yields a total of $135,798.

Which sounds better, losing value at a rate of 3.5% due to inflation or investing wisely, shooting for a 5% return?

This post was reposted from http://finlit.biz/estate-planning/can-you-build-a-downpayment-for-a-house-in-5-years/, originally written on July 30th, 2014.