More Straight Talk on Investing

5Hope for the Best—But Prepare for Something Less

Now that I've discussed how to save, the next question to consider is: How do you know whether you're saving enough?

People don't tend to ask themselves that question when making decisions about saving. They decide how much they think they can afford to save and then hope that they'll end up with sufficient money for their goals. Or, they only put away any money that remains after spending. But your notion of what you can afford to save could change if you make some quick calculations.

If you're really serious about accomplishing a specific goal, you'll want to first identify the goal and then figure out how much to save to get there. To obtain the answer, you have to work backward. The factors in your equation: (1) the amount of your goal, (2) the amount of time you'll have to save for that goal, and (3) the amount of investment return you can reasonably expect to achieve. Then, you do a little math.

For instance, say you hope to amass $100,000 for your child's college education over the next 18 years, and you expect to earn 8% a year on your investments. A calculator or a spreadsheet will tell you that you'll need to invest about $207 at the start of every month to accomplish your goal. This projection assumes that you reinvest all your income on the investment and do not make any withdrawals from the account during the period.

Is 8% a fair projection for your investment returns? It depends.

Over the very long term—the 94 ...