Who Cares About the Big Picture?

Learn more about us debt.

What does the economy have to do with your personal finances? 

In my opinion...everything.  Sure, the daily announcements of economic indicators and statistics may not affect you directly or immediately but there is definitely a downstream impact to you and those who choose to be aware of what's going on in the big picture will be much better prepared for any implications that result. 

Let me offer a few examples:

- Every week, we hear about the ever escalating federal debt (see the real time counter above) that have resulted from our consumption-driven lifestyles, numerous bailouts, and the increasingly liberal spending policies of our government.  Together, these factors are driving increases in our nation's money supply (e.g. government printing more money to pay the debts/interest) which will ultimately have an inflationary effect in our economy, especially as conditions start to recover.  A consequence of such inflation would be the depreciating effect it would have on the US dollar (causing the US dollar to be worth less in exchange for other foreign currencies) over the long term.  This macroeconomic effect can impact individual Americans in very real ways, from increasing the cost to travel abroad to increasing the cost of buying imported goods.  So an implication of this from a personal finance standpoint may be to start thinking about how to diversify your investment choices to maximize the buying power of your savings when this does occur.  For instance, it may make sense to allocate some of your investment portfolio to countries/markets whose currencies are likely to appreciate, so as to protect/grow your assets even as the US dollar depreciates (see my article on Profiting from China in Investments).

- Another macroeconomic effect that many Americans have become painfully aware of is effect of interest rates on the monthly payments for adjustable loans.  Should inflation increase or if the fed begins to tighten monetary policy, interest rates will increase and many more Americans who have ARM mortgages could be at risk of default or foreclosure.  So understanding the emerging trends that could impact rates may help you make the right decision on the type of loan (adjustable vs. fixed) you may want to get if you are buying or refinancing, or determine the amount that you want to borrow (and price of house) given the likelihood of higher rates/payments down the road.

- Another example is the fact that the high and sustained unemployment levels currently in the US would suggest that you should plan to have greater cash reserves than in the bull years.  While conventional wisdom has been to have 3-6 months of living expenses in cash savings as a buffer for a "rainy day" even such as job loss or illness, these days, I would advocate reserves in the 6-12 month range if at all possible.

 

 

---