How Much Money Did You Actually Make?

The Power of Diligent Investing

Dave Ramsey often highlights the idea of putting $100 a month into a Roth IRA. His message is simple and compelling: if you stay disciplined and invest regularly, your money grows. Over decades, the magic of compound interest can turn relatively small contributions into a seven-figure nest egg.

This message resonates with millions of Americans because:

• It shows anyone can build wealth by starting small.

• It proves consistency is more important than timing the market.

• It inspires confidence that long-term investing works.

And Ramsey isn’t wrong. The principle is true. A diligent saver who invests consistently in growth assets over decades has a strong chance of reaching millionaire status.

But there’s a piece of the puzzle that often gets overlooked.

Nominal vs Real Return

When financial experts or influencers mention an “average rate of return,” they’re usually talking about the nominal rate of return, the raw growth percentage before accounting for inflation.

• Nominal rate of return = The annualized growth on your investment before inflation.

• Real rate of return = The growth of your money after adjusting for inflation.

Why does this matter? Because inflation quietly erodes purchasing power. A dollar today doesn’t buy what it did 20 years ago, and it won’t buy the same amount 20 years from now.

👉 Real Rate of Return: Definition, How It's Used, and Example

So while your Roth IRA may grow to over $1,000,000 in nominal terms, the real value of that million could feel more like $600,000–$700,000 depending on inflation trends.

Why Purchasing Power Matters

Let’s put this into perspective.

Imagine you invest $100 per month for 40 years at a 10% nominal rate of return.

• Ending balance: about $584,000.

Now imagine you boost that to $200 per month.

• Ending balance: over $1.1 million.

That’s the number Dave Ramsey often points to. But here’s the catch:

• If inflation averages 3% annually, the real rate of return isn’t 10%, it’s closer to 7%.

• In purchasing power terms, your “million dollars” might only stretch as far as $450,000–$500,000 would today.

This doesn’t make investing less important. It makes understanding the difference between real and nominal returns even more critical.

Practical Implications for Millennials

Millennials and young professionals, especially those with variable income like sales reps and entrepreneurs, need to plan with real returns in mind. Here’s what that means:

• Plan conservatively: Use real return estimates (6–7%) in your financial models, not just the headline 10–12% often quoted.

• Increase contributions when possible: If your income grows, increase your monthly contributions to keep pace with inflation.

• Diversify wisely: Stocks historically outpace inflation, but don’t overlook bonds, real estate, or other inflation-hedged assets.

• Focus on purchasing power, not just account size: The goal is to retire with an income that maintains your lifestyle, not just a big number on paper.

Nominal vs. Real Returns at a Glance

• Nominal return = What your account statement shows.

• Real return = What your money can actually buy in the future.

• Dave Ramsey is right about discipline and growth.

• But: Without adjusting for inflation, you risk overestimating your retirement security.

FAQ

Q1: What is the real rate of return in simple terms?

• The real rate of return is your investment growth after subtracting inflation. It reflects how much your money actually increases in purchasing power.

  
  

Q2: Why is Dave Ramsey’s Roth IRA example both right and incomplete?

• He’s right that consistent investing grows wealth. But he uses nominal returns, which don’t account for inflation. Real returns show the true value of future dollars.

Q3: How can millennials protect their purchasing power in retirement?

• By planning with realistic real return assumptions, increasing contributions over time, and diversifying into assets that hedge against inflation.

  
  

Q4: What is a safe real rate of return to assume for long-term planning?

• Many planners use 6–7% for equities after inflation. Conservative planning ensures you don’t overestimate your retirement income.

Build Wealth With Eyes Wide Open

Dave Ramsey is right about the power of discipline, and millennials should take his advice to heart: invest early and often. But don’t stop there. Understand the real rate of return so you can plan with confidence, knowing how much purchasing power your investments will truly give you in retirement.

👉 Ready to make sure your Roth IRA and old 401(k)s are positioned for long-term purchasing power? Let’s talk about building a plan tailored to your future.