By JLP | March 31, 2010
Going back to 1926, the average monthly total return for the S&P is .78%. When you factor in inflation, that number drops to .53% per month*.
To put that in perspective, had you been able to invest $1 in the S&P at the beginning of 1926, it would have been worth $2,424.82 at the end of 2009 for an average annual growth rate of 9.72%. The math looks like this:
NOTE: Obviously, a number divided by one stays the same. I just wanted you to see the math.
The numbers look quite different when we factor in inflation, using the CPI (not seasonly adjusted). A $1 investment made at the beginning of 1926, would have been worth $200.23 at the end of 2009! So, although on paper, your account value if $2,424.82, it’s purchasing power is only worth about 8.3% of what it was in 1926. That’s what inflation will do your hopes and dreams.
So, if your goal is to become a millionaire in the future, you better factor in inflation. You can do that by using an inflation-adjusted expected rate of return when running your calculations. Anyone can become a millionaire. You just have to 1) start young; 2) save a lot; or 3) a combination of both 1 and 2. The following graphic illustrates what I mean:
One thing I need to point out is that my monthly savings numbers do not increase with inflation. Most likely, a person would be able to increase their monthly savings as they get older. Like I said, these are REAL returns. On paper, your account values would appear much larger.
So, what can you do with this information? Share it with young people who don’t think saving money and investing is important because they have time to worry about that later. The only way to take advantage of time is to use it wisely.
*I’m using returns for the S&P index, which do not reflect fees. However, a low cost index fund would track the performance of the index fairly closely.