We hear a lot about the economy and how it’s fluctuating and impacting our buying choices, but what do you really know how economics are really affecting your personal finances? In this second episode we continue discussing certain economic terms and phrases that have a significant impact in the way we make financial decisions. Having the knowledge and insight into these terms and phrases will help you better manage your own personal finances.
Economics: The study of what constitutes rational human behavior in the endeavor to fulfill needs and wants given a world with scarce resources.
Whenever you have more of something its value to you diminishes.
A $100 would be more valuable when you earn $1000/month than when you earn $1Million/month.
It’s very easy for us to get used to a higher standard of living, it’s easy to up, but very hard to go down.
When you don’t recognize that the more you add, the less value it adds to your life. You begin chasing more and more, with diminishing returns.
Something that used to satisfy doesn’t fulfill you the same way, used to be excited about going to McDonalds, used to be excited for a McDonald's Sundae, then Dairy Queen Blizzard, then Hagen Daaz… where does it end.
Inflation is the increase in the overall prices of products and services in our economy. Each dollar buys less as inflation grows. A low, stable rate of inflation is normal and healthy. The key to financial health is to be able to not just keep up with inflation but to beat it!
If you are afraid to start investing money, then you’re actually losing money each year just holding onto it. If inflation is 2-3% a year, you are losing that much each year. You have to be invested in something that will gain you more than 2-3% a year.
You don’t have to be an expert on economics, but you have to be aware that this affects you.
Unless you can lower your lifestyle by 2-3% a year, which is most likely not sustainable, you’ll need to invest in order to beat inflation and not decrease but increase.
If your money is going toward depreciating assets instead of appreciating assets, over time you’re going to get killed by inflation.
Vehicle go down in value.
Homes typically go up in value.
Investments go up over time (if you make wise choices).
If the inflation rate is 2% per year and a gallon of milk costs $2 today, it will cost $2.04 a year from now. Since it will require more money to purchase the milk a year from now the $2.00 is worth less than it did a year ago. Whenever goods and services require more money to purchase the implicit value of money goes down.
Inflation Impact on Savings
$1,000 today will be worth $903.92 after 5 years and $817.07 after 10 years, if you’re earning no interest on the account.
That’s why stuffing cash into a mattress is a bad idea. Investing your money in some form of equity or bond investment is arguably a better way to go.
A recession is a significant decline in economic activity that goes on for more than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade.
Making, selling, and buying of goods and services.
Companies make less, so they lay people off.
Less jobs means less spending, then less things are made, leading to a hard cycle to break.
Just because a recession occurs, doesn’t mean it’s going to destroy your life. You must be prepared for recessions because they will come. You must prepare for recessions, because they will come and you will be impacted in different ways. May be due to a job issues or just a decrease in investments.
Things to focus on before a recession comes:
Career insurance - networking, be a top employee.
Margin in the budget.
Investment money ready to take advantage of buying opportunities.
Buy a business.
Buying real estate.
Investing in the market.