In: Economics
Economics plays a role in personal finance. Describe the role that economics plays in your personal financial plan. Also, the use of credit plays a role in a personal financial plan. Describe the advantages and disadvantages of credit and explain how you will use it as part of your financial plan. Specifically address the following required elements:
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Role of economics in personal financial plan-
A financial strategy considers the economic environment in which you live. Consideration of the economy should play a part in the decisions that make up your financial plan, including; retirement investment choices, buying a house and deciding where to park your savings. The economic factors that affect the personal financial planning are-
Interest rates
Interest rates affect both sides of your balance sheet, your assets by determining how much income your savings earn, and your liabilities by determining how much you pay to borrow money, say for a mortgage.
Additionally, they affect your financial decisions in other less direct ways. For instance, interest rates play a huge role in house prices; high interest rates mean home-buyers with mortgages can afford to borrow less money, putting downward pressure on house prices and vice versa. This in turn affects the type of house you can afford and where you can afford to live.
Pay close attention to interest rate movements and make informed decisions that take into account this cost of borrowing money. Ultimately, you should put yourself in a position where you earn interest rather than pay it.
Changes to tax policy
Most of us lose about 20-30% of our gross income to tax before we even set eyes on it. This makes tax one of the most expensive items on our budget. The savvy among us know that this also makes it an area of potential savings. Consider for instance the recent changes to the deductibility of property tax. Doing away with that deduction dealt a huge blow to homeowners in parts of the country that have high property taxes. Those who were paying attention sought advice on how they could soften that blow. Some of them pre-paid their 2018 property taxes before the end of 2017. A move that may have saved them thousands of dollars. Pay close attention to changes in tax policy and how they affect your income and expenses. It is often a good idea to consult a good tax advisor to help you understand new tax policies and how you can optimize your tax strategy.
The stock market
Economists classify stock prices as a leading indicator; meaning it tends to turn down before a recession and tends to turn up before an expansionary period. Sustained movement of the stock market in one direction can tell you a lot about where the economy will go within the next 6 months. This is because the liquidity of stocks renders their market more sensitive and more quickly reflective of changes in the economy than other more sluggish economic indicators. Watching the stock market closely can help you make prudent decisions for the near future.
All of these indicators should be considered together rather than separately as part of your framework for making financial decisions. In this age of information overload it is easy to lose sight of what is pertinent information and what is not. I hope that this gives you a good idea of which economic indicators to watch closely.