Annuity: An annuity is a sequence of equal payments made at regular intervals.
| Situation | Payment pattern |
|---|---|
| Saving $200 each month | same deposit each month |
| Loan repayment of $350 monthly | same payment each month |
| Irregular spending | not an annuity |
Regular and equal: The key idea is not just repetition.
The payments are repeated at a fixed interval and are the same size.
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| Type | What happens |
|---|---|
| Savings annuity | money is added repeatedly and the balance grows |
| Amortization / repayment | money is paid repeatedly and the loan balance falls |
Quick classification
Which is which:
(a) paying $500 every month into an account
(b) paying $500 every month to clear a car loan?
Step by step
- (a) is a savings annuity.
- (b) is loan repayment / amortization.
Final answer
Savings annuity, then amortization.
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Timeline thinking: Finance questions often become easier when you imagine a timeline of equal payments.
| Time | Action |
|---|---|
| Month 1 | deposit $100 |
| Month 2 | deposit $100 |
| Month 3 | deposit $100 |
| ... | ... |
Do not confuse one lump sum with repeated payments: A single initial deposit is not the same kind of problem as an annuity with repeated deposits.
| Question type | Typical focus |
|---|---|
| Savings plan | future value after repeated deposits |
| Loan repayment | monthly payment or time to clear debt |
| TVM question | correct setup of N, PMT, PV, FV |
Spot the repeated payment: Words like 'each month', 'every year', 'regular deposit', and 'equal repayments' are the big clues.