Walker - Pass The 66 - 2015: A Plain English Explanation To Help You Pass The Series 66 Exam

Even though I started investing at least a decade later than I should have, I am proud to report that I now have enough money in my retirement accounts to see some light at the end of the tunnel. If I keep funding the accounts and investing wisely, I could shave several years off my working life. On the other hand, if I get too lazy to make contributions, or if I invest those contributions foolishly, I could end up adding several years to my career, whether I want to or not.

What about youwill you be able to stop working someday? Even if you keep working, wouldnt it be nice to know you didnt have to at some point? Maybe you are already saving and planning through a 401(k), IRA, or other retirement account. If so, your financial future is subject to factors such as inflation, interest rates, recessions, corporate profits, and credit ratings.

Lets start with inflation.

Some of my ancestors came to Chicago long before American banks were insured by the FDIC and never really trusted the idea of putting their hard-earned money in a bank that could collapse without warning. Several of my uncles and aunts would make purchases for washers & dryers or even used cars by simply pulling out a coffee can from a secret hiding place and grabbing a stack of twenty-dollar bills.

Unfortunately, if you put your extra cash in a coffee can, prices are probably rising throughout the economy. That means you are losing purchasing power as your money just sits there. Of course, it makes no sense to subject your cash to fire, theft, rodents, or flood, but even when you park your money in an FDIC-insured bank deposit, you usually find that the low rates of interest the bank pays do not keep pace with inflation . It might look as if youre earning more dollars, but because of inflation those dollars cant buy as much as they used to.

Inflation is a loss of purchasing power due to an overall rise in price levels. Your dollar used to buy a dozen eggs, for example. Now it buys only eleven, because the price of eggs has risen. What do you do now if you still need a dozen eggs? You spend more of your money. What if you dont have any more money? Thats the problem with inflation. If your bank CD is paying you 2% while prices are rising 3%, you are losing ground. Your inflation-adjusted or real rate of return would be negative-1% in that case.

Inflation is sometimes described as the result of too many dollars chasing a limited supply of goods and services. What would happen if they ran out of beer during the third inning at the old ballpark and then somebody stood up and announced hed be happy to sell a cold six-pack to the highest bidder? How high would the price of cold beer rise on a hot August afternoon with thirty thousand thirsty fans bidding for such a tight supply?

Thats inflation . At first maybe consumers will free up some money for gasoline by cutting back on snack chips. Maybe they can pay the power bill if the whole family agrees to brown-bag their lunch for a few months. While its always nice to see American families pull together like that, the fact is we dont like to see the snack chip company or the local restaurants lose revenue and resort to laying off workers.

A loss of purchasing power for consumers is a fairly obvious economic problem, but sometimes economists worry about the opposite scenario: deflation . While inflation can make things too expensive for consumers to buy, deflation can make things ever cheaper. With deflation at work profit margins at businesses will be crushed, as they pay last months prices for raw materials and then struggle to sell their finished goods at next months cheaper prices. Thats assuming they can sell anything to anyonewould you rush out to buy something today if you knew it would be cheaper tomorrow? Wouldnt we all be tempted to put off our purchases indefinitely, waiting for the prices of cell phones, clothing, and automobiles to drop in our favor? That would lead to lay-offs. And then those workers would have less money to spend and less confidence in their ability to buy anything on credit.

About two-thirds of the American economy is driven by consumer spending, so if consumers arent spending, thats a problem. Therefore, the Federal Reserve Boards Federal Open Market Committee ( FOMC ) is forever monitoring and manipulating short-term interest rates in an attempt to find the right economic temperaturenot too hot, not too cold. An inflation rate of about 23% is generally considered ideal, although it isnt as if theres a magic button they can push to adjust the economy.

Inflation/deflation is measured by the CPI , or Consumer Price Index , usually expressed as a percent of change from the previous month and from the same month the year prior. In other words, the CPI for October expresses the % the index rose or fell from September of this year and compared to October of last year. The CPI measures the trend for pricing of consumer goods and services, including food, beverages, housing, transportation, apparel, etc. Social security and retirement benefits are often tied to the CPI in that beneficiaries receive a cost of living adjustment based on the index. Occasionally, that cost of living adjustment factors in deflation, and beneficiaries receive smaller checks.

To eliminate two volatile/seasonal items from the index, economists focus on the index tracking all items less food and energy, frequently referred to as core inflation. Because an oil spill or weather event could send the price of energy or food into a shock, economists like to separate out these items from the items that the Federal Open Market Committee is more able to control through their monetary policy.