Q. I notice you are using a 9% average annual rate of return for most of the growth calculations in the journal and on this website. Why 9% and is that realistic?
A. We feel that 9% is a realistic illustration over long periods of time. The assumption is that this might be earned by investing in equities similar to those that comprise the S & P 500, one of the most common benchmarks for U.S. stock returns. This index has had occassional periods of negative returns. Historically, the longer money stays invested the greater the chances an investor will get positive returns. As an example, the table below shows the long term annualized returns of the S & P 500 over different time periods.
|10 years ending December 31st, 2009||
|15 years ending December 31st, 2009||
|20 years ending December 31st, 2009||
|25 years ending December 31st, 2009||
Obviously past performance is no guarantee of future results. It is also not possible to invest directly in an index. There are many considerations when making investment decisions and it is possible for an investor to lose money. Now that all of that has been said and based on the chart above you can see why 9% was picked as the annualized return rate for our mathematical illustration of a dollar a day over a 65 year time frame.
Q. My kids are well past “newborn” status. Can I catch up to give them a chance to have a million dollars by age 65 and how much money does it take?
A. You can catch up and the amount of money required to grow to a million dollars will depend on how old your child is. To get an idea see the “what’s my number” page.
Q. You’re suggesting I put money I save for my child into the stock market? Isn’t that risky?
A. Investments in stocks and other instruments do carry risk, including the risk that you could lose money. Another type of risk is that of inflation over a person’s lifetime which can erode future purchasing power. Historically, stocks have been one of the few investments that have outpaced inflation. This journal and website are intended to be an introduction to saving and investing and not a recommendation of any particular strategy or investment. The fact is, saving a dollar a day, whether in an FDIC or NCUA insured deposit account or in an investment like a mutual fund, will probably leave a person better off financially than if they do nothing at all.