The Retirement Corporation of America

Putting Your Economic Wisdom To Work

SO, FIRST OF all, you now have a sense of how the economy works and how Uncle Sam causes fiscal and monetary policies to work on the economy.

Second, you know the key economic reports that are important and will help you make sense of the economy.

Third, you know that the ups and downs of the economy are considered so important to so many people that hardly a detail about the economy goes unreported and unnoticed in the news.

Okay, so now that you know all this, how do you put all that knowledge to work for you? How do you take what is happening in the economy and incorporate it into all the plans you have made for mastering your financial future? Here are the basic rules you want to follow:

•  Remain vigilant. It's your money on the line and your financial future. Now that you have some idea of how the economy works and what the economic indicators signify—keep watch on them. Keep alert to what is happening in the economy. It's always more fun doing something when you know the rules.

•  Go for growth. The first thing you should appreciate is that it really is a growing economy. Go back nearly 150 years—through wars, panics, recessions and depressions—and you find that our economy has grown four years of every five. If it happened that way in the past, it almost certainly will happen that way in the future. Therefore, you are safe taking reasonable risks with your money. You can safely reach just a bit with your plans knowing that the odds always favor expansion over recession.

•  Be optimistic. There will be rainy days along the way—months, even years, when the economy grows very slowly or not at all. Slowdowns, even recessions, along the way are to be expected. If you treat each temporary setback as a disaster—bailing out of stocks and seeking safety in bank accounts—you won't have much of a financial future. Make plans and stick with them, confident in the knowledge that lean years in the economy are the exception—that very soon, the good times will be back.

•  Be realistic. Sure the economy grows four years out of every five. But it grows at a reasonable rate—about 3% to 4% a year on average. If you plan for reasonable growth in the economy over time, it's pretty likely that you will reach your financial goals. If you set goals that require super-heated economic growth, year after year, then you are not being very realistic and you probably won't hit your goals.

•  Don't obsess about inflation. The U.S. economy was wracked by inflation from the mid-1960s until the early 1980s. A whole generation of Americans grew up assuming inflation was the normal way of economic life. It isn't, and don't let inflation fears guide your planning and decision-making. Serious inflation—10% or more—is comparatively rare in our economy, usually following a war. Plan for tomorrow assuming that prices will go up around 3% a year. You invest in stocks so your investments keep ahead of moderate inflation. Don't invest defensively—in gold or precious gems or whatever—on the assumption that heavy-duty inflation is bound to return. The odds are you will never experience inflation of 10% or more through the rest of your life.

•  Watch out for change. Nothing about managing your finances is automatic. You can't put yourself on auto-pilot and hope for the best. The economy is always in motion—swinging from expansion to contraction, and back again. Use your growing knowledge of how the economy works to keep alert for change. Make change work for you.

Keeping change on your side. Okay, you want to use your growing knowledge of how the economy works and how to track it to watch out for change. What does that mean? It means that the greatest risks and the greatest rewards come when something fundamental about the economy is changing. You keep watch on the economy most of all so you can see change coming and act accordingly.