I also want to touch base, too, thinking about inflation.

We mentioned before that there are different types of assets and some of

them will have a great rate of return much higher than the rate of inflation.

And some like our savings accounts may not really keep pace with inflation they

might be lower than that.

So we want to think about how is our rate of return relative to inflation.

Are we beating it?

So we have two rates that we've defined.

The real rate is the after inflation adjusted return.

Or what we call the purchasing power rate.

That actually measures right what our money can buy for us.

The nominal rate measures just how much the dollars have changed,

what's the change in dollars.

How much have they increased?

So real rates of returns consider how much inflation has affected our money.

Nominal rates of return simply look at the absolute value of how our money is grown.

So we look at this as a simple equation where little r is the real rate and

big r is the nominal rate.

So, 1 plus the little r equals one plus the big r,

divided by 1 plus i, where i is inflation.

So in other words, right, we net out the rate of inflation.

And make sure that what we're left with measures purchasing power for us.

This is important especially for long-term things like retirement,

where we think about how much of a lifestyle do we want to be able to afford.

When we think in lifestyle terms, we're thinking in terms of purchasing power.

We're thinking of how much do I want to be able to spend.

Well that's after taxes.

And after inflation in some ways,

especially the further off in the future it is.

So if Michael can earn a nominal return of 15% of it,

on his investments, and he expects inflation to grow for 3.2%,

how much money will he have in today's dollars?

And that's a way of saying, what would it buy me today?

And that's how we account for inflation.

So we make this little adjustment here,

take it off, and the after inflation adjusted return is about 11.43%.

So again, it shows us really what's the measurable amount of money we have.

This doesn't account for taxes yet,

if we took taxes off we'll see there's even a lot less money there.

So we want to keep these things in mind, because if were investing for

the long run again,.

If we have certain goals, we need to think of those in terms of

those are after taxes already, and oftentimes not adjustable for inflation.

So how do we decide the right account?

Well, if it's for education,

then we're going to look at things like section 529 plans, Coverdell IRAs.

Why?

Because they have tax advantages associated with them.

Money that we put in to those accounts, if they're used for

qualified higher education expenses, when they're,

when the money is withdrawn, its not subject to taxes, that's fantastic right?

That's more like a raw fire rate,

where money grows, we don't get any deductions today,.

But money grows tax-free if it's used properly.

And then of course, right, we have the retirement account.

The IRAs, the 401(k)s,

the 403bs, and in many of these cases we have a choice between Roth or Traditional.

Now again, I get asked this question a lot, Doctor G, do I want Roth or

do I want Traditional?