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.

Charles is a 28-year-old lab technician whose primary long-term financial goal is to own a home. Therefore, he wants to begin an investment plan that will make this a reality within 10 years. He currently has $5,000 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 8%, and he would like to save a total of $100,000 for the down payment.

Table of Future Value Factors

Year	2%	5%	8%	10%
1	1.020	1.050	1.080	1.100
5	1.104	1.276	1.469	1.611
10	1.219	1.629	2.159	2.594
40	2.208	7.040	21.724	45.258

Table of Future Value Annuity Factors

Year	2%	5%	8%	10%
1	1.000	1.000	1.000	1.000
5	5.204	5.526	5.867	6.105
10	10.950	12.578	14.487	15.937
40	60.401	120.797	259.052	442.580

If he invests the $5,000 today, the terminal value of this initial investment in 10 years (earning an average 8% return) will be

. This means that he must accumulate the remaining

through his annual savings plan to obtain the full $100,000 for the down payment. Still assuming an average return on investment of 8%, the additional yearly investment required to reach Charless targeted financial goal within 10 years is .

Suppose instead that Charles had no capital saved and thus needed to accumulate the entire $100,000 in the next 10 years. In this case, his annual contribution would have to be .

When Charles starts with an initial investment of $5,000, the total amount that he ends up contributing to accumulate $100,000 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 Charles has determined the annual amount he needs to save, the next step toward achieving his goal is coming up with an investment plan.

True or False: The appropriate investment plan depends on the investment objective.

True

False