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A country is an organization of individuals—when something affects the country, it also affects the individuals, and vice versa. Thus, it would be untrue to say that if recession or boom hits a country, individuals are not affected by it.
Personal finance deals with a person or a family unit, and the main facets for personal finance are the amount, taxation, security and origin of the money needed for individuals and their families for survival. We can see how personal financial health is affected by country’s economy throughout the world today, especially in United States.
How are we affected by fluctuations of the economy?
· It Depends on the Current Economy. Fluctuations in a country’s economy don’t always have to indicate bad news is on the horizon. Economic cycles are gauged over a period of months or years and can reflect periods of healthy economic growth, commonly referred to as an ‘economic boom,’ as well as periods of detrimental economic growth, known as a ‘recession,’ or a ‘depression.’
· The Economic Boom Scenario. During periods of strong economic growth people experience a healthier financial profile. Inflation rates drop, unemployment rates fall, and ROI’s, or Returns on Investments begin to escalate. The overall influx of more income affects individuals living under these conditions by allowing the purchase of more goods and services.
When this money is used to purchase products from local merchants the overall strength of the economy continues to grow and the standard of living remains enjoyable for the majority of citizens involved.
· Living Through a Depression/Recession. Unfortunately periods of healthy economic growth are followed by periods of Depression or Recession. These periods represent a stagnation of the local economy and adversely affect the citizens of a country experiencing this type of event.
During one of these decreasing periods of economic growth, inflation rates begin to rise. New taxes are enacted and assessed to assist with recovery programs. Unemployment rates also start to escalate, jobs become harder and harder to find.
People are shocked into holding onto their money, saving as much as they can, making investments to try and protect their financial future, and ROI’s all so shut down or begin to become less valuable, interest rates climb and the amount of money we are left with to spend includes paying the bills and feeding the family.
· Taxes and rates. Your tax rate, tax bracket often depends on the economy. The mortgage rate and other loan rates are directly proportional to the economic condition.
What are the indications the economy is about to shift?
The main economic gauge, to me, are housing market and stock market. Visitors to the local mall and people dining in expensive restaurants can be a local market phenomenon. But, these two markets are broad-based and give accurate measurement of the economic situation.
The Housing Market.
The fluctuation of the housing market is usually worth keeping an eye on. When the economy is about to take a nose dive into a recessive state the housing market stalls. People stop investing in the purchase of, or construction of a new house, which results in a ‘Buyer’s Market.’ This situation basically means there are more houses for sale then there are buyers to purchase them. Home owners are forced to take less for their house than they think it is worth in order to make the sale and free up their own personal cash flow.
The alter effect of this circumstance, known as a ‘Seller’s Market,’ is a significant sign that the economy is on the rebound. As the recession unwinds people begin to invest in that new house they’ve always wanted, houses begin disappearing off the market and the tables are turned.
During these periods there are more people wanting to buy houses than there are available in a particular location, which raises the value of the homes in the surrounding area and allows home owners to ask more for their house than it was originally purchased for.
How do you know about housing market situation? I have no clear answer. National association of home builders (NAHB) has some statistics on home prices and trends. Internet has enough resources to keep you informed.
The Stock Market.
Keeping an eye on the stock market will also provide insight into which way the country’s economy is headed. If investors begin slowing down the amount of buying, selling and trading across the market they’re doing it for a reason, they see things in the country that lead them to believe a negative shift is about to occur and they protect their money accordingly.
If the market trend experiences a steady upward trend then the economy is on the rebound and a positive outlook on individual financial future can be expected to occur.
Many of us that don’t participate in the purchase, sale or exchange of stocks, bonds and commodities have no idea how to determine when the stock market slows. You don’t have to be a finance geek to know where to look. Only 10 -15 minutes of coaching in enough for you to understand market performance and trend.
Watch the closing value of the stock exchanges, if it continues to steadily decline that’s an early warning sign that trouble is on the horizon and appropriate action needs to be taken to minimize financial losses.
Why is this information important?
Becoming aware of economy allows us the opportunity to make necessary adjustments to our lifestyle. Disregarding this type of information normally results in an unhealthy personal financial portfolio. Investments can be lost overnight; the net worth of these investments can undergo a drastic reduction and culminate in catastrophe on the family front.
To put it briefly, the country’s stability and financial health of an individual go hand in hand. If the country’s economy is in good shape, the average individuals will be in good financial condition; if the country is moving toward recession, the individuals lose their financial stability. And we all shall adjust our lifestyles according to the factors of macro economy.
Do you keep track of the economic situation? Do you agree that your financial health is tightly coupled with the over all economy? Do you do changes in your lifestyle based on economic condition?
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I must confess that I’m not great at keeping track of the economic situation – I do pay attention to the news and see how my investments are doing, but I’m fairly clueless as to where things are going and what I should do next!
You’re lucky that America is not facing the situation some countries like Greece is facing.
It seems like the savers in the country are also a good gauge of economic activity. The more the national savings rate dips, the more positive feelings there are toward the future economy.
Yes this is true, one other data to keep an eye on
It’s hard not to pay attention — and not just domestic but global economics make an impact.
Yes, you open a news site or tune in to the channel, you get the news from world economy.
I definitely think they are related and keep up with the economy is not the sole determination of how my finances are doing. If you work hard you can succeed in any economic climate.
Good observation but some way or other you’ll get affected.
I listen to NPR, but that’s about it. While it’s easy to claim that I haven’t been able to get the job I want because of the poor economy, the reality is probably more along the lines of my own shortcomings than that of the economy.
Economy has a hand in it, definitely. In a growing economy everyone has something to do.
I agree that it is important to inform ourselves and watch for economic trends so that we can plan accordingly. I hope the current economic downturn has been a wake-up call for people to save more and not get over-extended with debt.
It should also serve as a wake up call to not take risk with investments. Also hopefully many learned the lesson about diversification.