I am a fanatical follower of Mr. Money Mustache.  This rather amazing specimen of an INTJ used financial common sense and a very uncommon amount of Life Wisdom to embrace a frugal, environmentally-conservative, socially-engaged lifestyle that freed him and his wife and young son from an empty existence of endless consumer consumption and ultimately, at the age of 30, from the need for full-time employment.  No inheritance, no investment windfalls, no magic - just the intellect to know that just because you make $70,000 doesn't mean you have to spend $70,000 (and the discipline and organizational acumen to follow through!).

Respect the 'Stash

Mr. Money Mustache - MMM for short - preaches a gospel of riding your bike, buying used, cooking your own food, frequenting the library, cooperating with your neighbors, tracking your habits and optimizing away the trivial.  He's not some crazy survivalist living an ultra-spartan existence in the woods somewhere - he's a devoted family man with a huge list of hobbies and pretty much the greatest life I can imagine.  He owns a home and a car and he travels with regularity, supporting it all on $27,000 a year through careful consideration of what's actually important. He's breaking into the mainstream because he addresses something that most personal finance gurus neglect: maximizing money for money's sake is a fruitless endeavor, and personal finance is only really useful when applied as a tool for maximizing happiness.

For discussion of historical investment returns since 1950, see this article instead.

The Internet is full of people arguing about the stock market.  A question I'm interested in: if my parents or grandparents had invested in an index mutual fund that followed the S&P500 inside a tax-advantaged account such as an IRA or a 401(k), how much money would they have today?

Toward answering this question, I created the SimVestment spreadsheet that I shared in a post last month.  It uses historical S&P500 data to simulate what would have happened if a particular investment schedule had been followed over a period of time in the past.  The spreadsheet takes into account the automatic reinvestment of dividends, adjusts for inflation, and can handle investment rates that change with time; the investment rate can be automatically adjusted to a constant value in 2013 dollars, making the dollar value amounts a lot more meaningful.

As I discussed in the previous post with regards to arithmetic and geometric means, it's very important to clearly define what it is you're calculating. Take, for instance, the graph of annualized return from that previous post. Each color is a different starting year, the x-axis is the number of years invested, and the y-axis is the annualized, inflation-adjusted rate of return:

Play with the original graph here

As the graph title states, this visualizes the annualized real return over different time periods.  You could use this information to calculate the net real return of a lump sum invested all at once.

Going into the spreadsheet, I changed the 'initial investment' to zero and set the 'monthly investment' to $1000, selecting the option to invest at a constant 2013 dollar rate.  The spreadsheet then simulates a situation in which you invest a constant value (in 2013 dollars) every month.  The graph then looks like this:

Play with the original graph here

All investors must keep in mind that historical returns do not guarantee future returns.  However, the past is often a useful place to look to get some sense of what to expect in the future.  This article shows quantitatively that long-term, annualized, inflation-adjusted returns on the US stock market during periods from 1950 to the present have been approximately as follows:

40 years - - - - - - - (5.0 to 7.5%)
35 years - - - - - - - (5.0 to 7.0%)

Play with the original graph here