Inflation: What Is It And Why Does It Happen?

Written by David Berky


Continued from page 1

For example if you are 30 right now, wouldn't it be great to retire with a million dollars when you are 60. You could live on that forever. Right?

Well, let's factor in just 3% inflation for 30 years and see how much your million will buy then. After 30 years of 3% inflation, one million dollars will buy about $400,000 worth of goods and services. That's 60% of your money gone to inflation.

If you were counting on a monthly retirement amount of $2778 each month for 30 years, you now only haverepparttar equivalent of $1111 each month. Less than half! Could you live on $1111 a month?

Sure you may have your home paid for and you won't have to buy expensive work clothes or pay for lunch every day, but your medical bills will go up as you get older and your insurance costs will increase. Also you may want to golf or travel more than you do now. You will have more time for hobbies; how will you pay for them?

The biggest problem I see with a lot of long range financial planning, especially retirement planning, is that people forget to factor inrepparttar 112683 effect of inflation on their investments and savings.

You may be able to live on $2778 a month at today's prices, but could you live on $1111 at what prices could be 30 years from now.

So what can you do about inflation? Really nothing. It is out of your hands.

But when planning forrepparttar 112684 future you can include it in your calculations. If you want to live onrepparttar 112685 equivalent of $2778 a month when you retire 30 years from now, you need to plan to save/accumulate $1.8 million and have it invested at 5% after you retire and want it to last 30 years.

That means that if you are earning 11% (asrepparttar 112686 stock market has averaged forrepparttar 112687 last 30 years) and you are 30 now, you will have to invest $500 each month to achieve this goal. If you only invest $100 a month you will need an average return of 18.4%. (If you can average that, you should be managingrepparttar 112688 world's money!)

A good financial planner will understandrepparttar 112689 effects of inflation and help you plan for them. But I suspect that some less-trained "planners" (who are probably more like salespeople in a financial planner suit) tend to "forget", ignore or don't understand inrepparttar 112690 first placerepparttar 112691 effects of inflation.

Leaving it out ofrepparttar 112692 plan makesrepparttar 112693 calculations easier and may even help them get more "sales" because you are not discouraged byrepparttar 112694 truth. And their "product" (investment) may not seem as inadequate as it may really be.

Another quick way to account forrepparttar 112695 effect of inflation is to subtractrepparttar 112696 inflation rate from any rate of interest you will be receiving on an investment. So if you are going to assume a 3% inflation rate andrepparttar 112697 assumed rate of return is 11%, dorepparttar 112698 projection with only a 8% rate of return or interest.

This will give you a more accurate picture ofrepparttar 112699 value (notrepparttar 112700 amount) ofrepparttar 112701 investment at its maturity.

Some investments such as real estate and precious metals (gold, silver, etc.) actually benefit from inflation. This may make you want to truly "diversify" your portfolio into more types of assets, not just more types of stock.

Inflation does not have to be scary as long as you understand how it works and how it affects your future money values. Accounting for it in financial equations and projections can be done simply. But overlooking it or downplaying its effects can cause you to miss your financial goals by a wide margin.

© Simple Joe, Inc. David Berky is president of Simple Joe, Inc. One of Simple Joe's best selling products is Simple Joe's Money Tools - a collection of 14 personal finance and investment calculators. This article may be freely distributed so long as the copyright, author's information and an active link (where possible) are included.


Do Lifestyle funds provide greater security?

Written by Ulli G. Niemann


Continued from page 1

Take for example,repparttar Enterprise Group of Funds. It shows an expense ratio of almost 2% plus a sales charge of 4.75% according to Morningstar. Tackonrepparttar 112682 underlying expenses and you're paying out more than 3% a year in investment expenses.

If you're a new investor (with less than $10k), and have your account at a discount broker, you can add a minimum of 1% per year in fees just forrepparttar 112683 privilege of having an account. That bringsrepparttar 112684 total up to 4% in annual expenses.

Talk about adding insult to injury.

FOFs are sometimes being touted asrepparttar 112685 only fund you need no matter whatrepparttar 112686 investment climate. So, let's compare to see howrepparttar 112687 Enterprise fund of funds performed duringrepparttar 112688 same period as mentioned above forrepparttar 112689 Freedom funds:

Enterprise Group of Funds: -35%.

The bottom line is that no matter what type of mutual fund you choose, or what anybody claims it will do for you, you must be vigilant and see if it does what you were told it would.

In investing, there is simply no such thing as a sure thing. Sure you need to know how to recognize a good investment. But just as important-maybe even more important-you must know when to recognize that a good investment idea didn't work out, cut your loss, and sell.

Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped hundreds of people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit: www.successful-investment.com


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