What caught my eye this week.

The knowledge gap about money and investing between you guys and the average person in the street is staggering.

A reader let me know me recently that their “genius level” friend was left baffled by our website. I was pointed to the story in the comments on the Financially Free By 40 blog:

I love Monevator, and the authors, and the content. The site has helped me so much and I’m wildly indebted to the cheapest broker table.

I suggested Monevator to my (bright, mathsy, actual genius-level-IQ) relative because I wanted her to consider dumping her expensive IFA and go it alone.

I sent a couple of Monevator links, including the one to Lars Kroijer’s excellent video series.

Instead of following the links, she searched for Monevator and started reading the first page, which was a wildly complex post (I think about tax efficiency of bonds and bond funds).

She dutifully ploughed through the first two-thirds of it, before being utterly convinced that investing was too hard for her to do alone, and that she needed her comfort-blanket IFA more than she realised, and that her IFA was doing all this in their sleep […]

It’s great that Monevator has the detailed bond-focused page, it is a useful resource; but without a flashing warning for newbies to go avoid reading it as a first article I’d struggle to recommend it to a beginner.

Does that make sense?

I’ve swapped a few emails with this thoughtful reader and we’ve agreed there’s no easy solution, particularly for an established site like ours.

I think we’re pretty much set up for fanatics now. Or at least the pretty clever

If you think I exaggerate, then go test yourself via the short financial quiz that CNBC published this week.

Don’t worry – it’s a US site but the questions are relevant wherever your are in the world.

And double don’t fret that you’ll get something wrong and be left virtually blushing in front of your fellow Monevator readers.

While fewer than one-third of Americans could answer all three questions correctly, most of you will ace it 100%.

Income inequality and wealth inequality are hard enough to do something about. But I have no idea how to tackle this gap.

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A million doesn’t go half as far as it did, but making a million is still the first goal of almost any new entrepreneur I meet.

It’s also a target for many savers.

For example, a million pounds can buy you a (hopefully) steady and inflation-proofed income stream from equity income investment trusts that’s well above the average household income – provided you’re prepared to ride out the volatility of equities. With luck you wouldn’t even need to touch your capital.

Alternatively, if you’re a passive investor and a fan of the 4% rule you might use your million to model a £40,000 a year income in retirement. (But be aware of the many caveats! ((This so-called rule is not a rule, 4% may be far too high a withdrawal rate in the current environment, and it assumes you eventually spend all your capital. A deeper discussion is for another day!)))

But what if you’re still 20 years from hitting the magic number? In that case, inflation strips away the buying power of your hoard. You’ll need much more than a million to buy the equivalent income or assets that you could today.

This was why we created the millionaire calculator, one of Monevator’s small but shiny collection of personal finance tools.

The millionaire calculator enables you to work out:

• When you’ll make your million, based on your current savings and returns.

• How much you need to save to make a million by a particular age.

The rate your savings grow is shown in a pretty graph, which demonstrates the power of compound interest.

There are also three currency options, because we’re internationalists around here.

Understand the effect of inflation

Unlike with some calculators I’ve included an inflation setting in this tool.

Look below the graph and you’ll see what your eventual million is worth in today’s money. The tool also tells you how much you’ll need to save to reach the equivalent of a million today by that target age.

The bad news is you’ll need to save a lot more than you think, but at least the millionaire calculator gives it to you straight.

Play around with the interest rate setting. This is the rate of return. To get a flavor for what’s reasonable, look at my articles on UK historical rates of return, or US rates of return if you’re from over the pond.

If you’re 25 and 100% invested in equities, a 7% return with 2% inflation seems reasonable to me in the current climate. Use a 5% return if you’re more skeptical about future returns, and 3% inflation if you’re skeptical about central banks. Dial down further if you’re older and have more low-yielding fixed income in your portfolio.

Two final points:

• Real life is much more volatile than the smooth graphs from such tools suggests. It’s best to over-save, and be left with the problem of how to spend the excess.

• While having a target sum like a million can be very motivating, you may need to grow your income to get there in a reasonable time.

I hope you enjoy the millionaire calculator. Send us a postcard when you make it!

Also check out our mortgage repayment calculator and compound interest calculator.

What caught my eye this week.

A reader prompted an email discussion with my co-blogger The Accumulator about what the £1 million pension lifetime allowance (LTA) meant for where you should hold your different asset classes.

The reader said he thought bonds should go into his SIPP and equities into his ISA, since there was a lower chance of the total return from bonds eventually pushing him up against the LTA. In ISAs, of course, his equities could grow indefinitely without any such fears.

Interesting and novel idea, I thought, albeit a rich person’s headache to have. The Accumulator was less convinced. We kicked about various pros and cons.

I also thought about this when reading a White Coat Investor article this week on these sorts of allocation decisions (albeit in a US context).

Because as much as I like discussing investing minutia with my co-blogger, I agree with the White Coat Investor that getting things approximately right is infinitely preferable to being paralysed by attempting to get them exactly right.

WCI writes:

“The truth is that investment management is probably the least important aspect of your financial success and certainly the easiest to automate.

Maybe it’s okay to quit trying to optimize it (especially since nobody really knows the optimal asset allocation a priori) and just get something reasonable done.

You can certainly save yourself a lot of hassle and advisory fees that would help make up for any under performance issues.”

I often get emails from anxious readers who’ve been wondering for half a year what platform to use to begin investing £50 a month on, or something similar.

It’s great that they’re paying attention to costs and consequences. But at this level it’s far more important that they just get started.

Have a great weekend!

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