No question about it: financial planning can be a high maintenance activity. In addition to certain tasks that should be performed regularly (e.g., checking one's credit file for errors and calculating net worth), there are tax laws to keep up with, as well as details about one's retirement plan and insurance policies to decipher.
Another facet of financial planning is understanding the jargon used by professionals in the field and the financial media. Below is a description of five terms that are commonly used in financial reports:
Inflation - The erosion of purchasing power over time. For example, $100 at the beginning of the year buys less than $100 at the end of the year. If the annual inflation rate is 2 percent, the $100 you spend on groceries in January buys only $98 of food in December. The inflation rate also affects savings. If a savings account earns 2 percent interest during a year with a 3 percent inflation rate, you lose 1 percent of the purchasing power of the money in savings. Over several years, this makes a big difference.
People on a fixed income feel the effects of inflation the most. They may have the same income for ten years as prices steadily rise with inflation. If the inflation rate is three percent each year for ten years, people will pay 30% more for electricity than they did ten years prior, even though their income remains the same.
Interest Rate - The percentage charged by banks or credit card companies for loaning money or the percentage paid by banks for borrowing your money held in savings accounts, checking accounts, or certificates of deposit. Actions by the Federal Reserve System influence the interest rates charged to consumers.
Consumer Price Index (CPI) - The Consumer Price Index (CPI) is a measure of inflation used by the U.S. Bureau of Labor Statistics. Changes in the price of more than 300 goods and services are tracked and recorded. Because you may not buy the same goods measured by the CPI, and because inflation affects people differently, the CPI may overstate or understate the true rate of inflation for individuals and families. If your household has high medical expenses, children in college, or high housing expenses, your true inflation rate may be higher than the CPI you read or hear about.
Index of Leading Economic Indicators - The Index of Leading Economic Indicators is tabulated by the National Bureau of Economic Research. It attempts to predict expansion or contraction of the economy. The index turns down before a decline in growth. However, it is impossible to tell beforehand exactly what the economy will do - only by looking back can these trends be seen clearly. As a result, the index is not completely accurate. Consumer confidence is one of the factors considered in this index. High consumer confidence indicates that consumers might buy more, and, thus, the economy might improve.
Dow Jones Industrial Average (DJIA) - The Dow Jones Industrial Average is an average of the stock price of 30 selective stocks. It is widely quoted each day as a barometer of stock market activity. Because the Dow Jones Industrial Average uses such a small number of stocks, it is often criticized for not representing the whole market, which is why other indexes, such as the Standard and Poor's 500 and Russell 3000, also are used.