How Much Capital Do You Need to Start Investing?
The motivation for making investments is largely driven by the goals you have. These goals could be short-term such as buying a new car, saving for a down payment or save enough to take a year off and travel. In any situation, the first step is to identifying the amount of capital you need and how much risk are you willing to take for the return you expect.
Jake is a 25-year-old financial consultant whose primary long-term financial goal is to save enough money to comfortably retire. Therefore, he wants to begin an investment plan that will make this a reality within 40 years. He currently has $10,000 saved for this purpose, and he wants to determine the appropriate monthly savings amount that will allow him to reach his goal. He estimates that he can earn an average annual return of 10%, and he would like to save a total of $500,000.
Table of Future Value Factors Table of Future Value Annuity Factors
Year 2% 5% 8% 10% Year 2% 5% 8% 10%
1 1.020 1.050 1.080 1.100 1 1.000 1.000 1.000 1.000
5 1.104 1.276 1.469 1.611 5 5.204 5.526 5.867 6.105
10 1.219 1.629 2.159 2.594 10 10.950 12.578 14.487 15.937
40 2.208 7.040 21.724 45.258 40 60.401 120.797 259.052 442.580
If he invests the $10,000 today, the terminal value of this initial investment in 40 years (earning an average 10% return) will be. This means that he must accumulate the remainingthrough his annual savings plan to obtain the full $500,000. Still assuming an average return on investment of 10%, the additional yearly investment required to reach Shen’s targeted financial goal within 40 years is .
Suppose instead that Jake had no capital saved and thus needed to accumulate the entire $500,000 in the next 40 years. In this case, his annual contribution would have to be___.
When Jake starts with an initial investment of $10,000, the total amount that he ends up contributing to accumulate $500,000 is equal to the initial investment plus the additional yearly payments, for a total of____.
When he starts with no initial capital contribution, the amount he ends up contributing is equal to the sum of all annual contributions you calculated in the no-initial-capital scenario, for a total of___
Once Jake has determined the annual amount he needs to save, the next step toward achieving his goal is coming up with an investment plan.
The appropriate investment plan depends on the investment objective.
A. True
B. False