# Better Get to Saving if You Want to Become a Millionaire

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:

[(2424.82 ÷ 1)1/84] – 1

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.

## 13 thoughts on “Better Get to Saving if You Want to Become a Millionaire”

1. BG says:

Excellent job putting that together — I know that was a lot of work.

One question I have: you say the average monthly growth growth rate of the S&P 500 (inflation adjusted) is 0.53% — which works out to about a 6.6% yearly rate right?

It’s nice to finally get a realistic growth rate number to use for retirement planning. Thanks!

2. BG,

Correct…6.51% according to my numbers (9.72% before inflation).

I wish I had data for other indices like the SmallCap and MidCap.

3. Retiredat40 says:

But what about Obama? This post reminds me of a song by REM.

“It’s the end of the world as we know it. But I feel fine.”

4. Retired,

You lost me.

5. Retiredat40 says:

Sign me up for 9.72%. You are one optimistic guy. We must be on the verge of a Republican revolution.

6. Everything should be hunky-dory for you since your dude’s in office. Obama’s gonna bring prosperity to everyone!

7. Retiredat40 says:

I’m not worried too much about it. But if I was putting together a savings chart trying to give an expectation for the future, I wouldn’t calculate more than 8% at the most. I’d use 7% as a realistic figure even if I knew the economy was going to grow at the same rate it has over the past 25 years.

I know your chart is meant to show people how much they need to save. But you are way underestimating how much they need to save unless you are an idealist. That’s the problem too many people have. Idealistic expectations.

Surprising to see them from a guy that thinks like you do about the future.

8. Retired,

I’m basing my numbers on 1,008 months of data. These numbers include the great depression, the 1970’s, the internet bubble, and the housing crisis.

It’s amazing to me that you disagree with almost everything (maybe everything) I post …lol.

9. Retiredat40 says:

I know you are. You are projecting the return of a country that went from an agricultural economy with a good portion of the population literally suffering from malnutrition to the largest economy in the world. That type of economic growth ain’t happening again. From no one investing in stocks to the 401(k) generation. Past performance is not an indication of future returns.

The only thing you are more religious about than your Republican views are your views on the stock market.

No point in agreeing with you on anything because you know you are right. I just try to pull you out of the ditch when needed like a Good Samaritan should. If not for you then for the people that might actually believe it.

10. BG says:

LOL — take a dry / mathematical / statistical posting on historical returns — and the comments got ‘Political’ by comment #3. This must be a record.

11. Yeah, and when I write something political, the liberals start whining about how they come to this blog to read about personal finance stuff…

I can’t win…lol.

12. Retiredat40 says:

This didn’t really have anything to do with politics. It’s all about finance. I just dropped Obama as a joke because JLP is always making political posts about how Obama is destroying the country. I found that a little ironic for someone with such a rosy outlook.

Even if it was political, the record would be #1 on this blog. This was nothing.

13. Stacey says:

Perhaps if the savings were invested in the China/India/etc region, the return would be spot-on. Pick your index fund/eft accordingly folks.