Important Aspects of Personal Finance in A Changing Economy
Living standards have gone up, the meaning of homes has changed to multi-storeyed castles, there is no cap on high paying jobs, and so much more to sit and think of. There is almost nothing tangible in this world that cannot be bought with money. Yet, in this changing economy, the level of satisfaction and personal achievement among people is lagging. People are constantly running after making more money with a never-ending urge. Some of its onus can be laid on the dynamic economy that keeps on changing its benchmark standards.
With such a spirited economy, it is impossible to keep on a static track. Change is certain and it is important to constantly for cope with this change diligently and profitably.
Here are some key takeaways on the important aspects of personal finance in a changing economy:
GDP has the most dramatic effect on the global economy and your financial plan
GDP or gross domestic product is now a well-known concept to every investor. Every second day, the falling GDP catches the attention of business enthusiasts and economists, yet there is only a minimal improvement in the situation. However, GDP is not just a macro factor, but it also affects people at the micro level, leaving investors gasping for some breathing room.
The sluggishness in the markets, slower growth rates, increasing unemployment, has cumulatively contributed to a low GDP and the general investor is bound to face its adversities. In such changing environments, it is evident that your personal finance strategy may seem inadequate. The idea in every financial strategy is to set goals and plans relative to personal choice and the prevailing market. When the markets and the economy (on a broader level) are not stable, the financial plan is bound to quiver. In these changing trends, it may be better to preserve money in traditional saving methods.
Inflation is an uprising trend now
Until the past few decades, inflation was known to be a money-eating evil that could be dealt with by making some alterations in the economic system. Inflation, however, seems to have gained immunity against all the knick-knacks of the economists who try to curb it or at least reduce it. Not only does it affect the purchasing power of the common man and the whole economy, but it also has been significant in deciding the future of the ruling government. There are several examples in history where people have voted a government out because of a rising rate of inflation.
Inflation not only affects your day to day budgets but also causes a deep impact on your savings and investments. As a general rule, the idea of saving money and investing it is to ensure that your saved capital appreciates over time with minimum possible risk. However, when inflation factors in, your return percentage changes drastically. Let us say you earn a return of 8% on your investments and the inflation rate is 2.5%, then your actual profit percentage is (8%-2.5%) = 5.5%.
The figure would substantially lower further when taxes are factored in. This phenomenon is called capital erosion.
Investing in commodities like gold and other equities can help you beat inflation to a great extent. You must keep in mind that investing in fixed commodities is good for the stability of your investment portfolio but will not yield the desired profits.
Fiscal and monetary policies control the system
Fiscal and monetary policies are two different concepts that shape the economy and hence the common investor’s portfolio as well. Monetary policy is a governing policy that allows governments to control the cash supply and interest rates in the economy. A financial institution such as the central bank, controls and governs the monetary policy of a country. Fiscal policy is a government’s tool to shape a nation’s economy in terms of taxation and spending. Both these policies are highly instrumental in managing and regulating a country’s economic policy and development at the macro level. It also regulates the purchasing power of the people at a micro level.
Consumption in households majorly drives the economy but strict fiscal and monetary policies can take away the consumption capability of consumers. These policies affect the major decisions that investors make like taking a home loan or a car loan. When the governments are too inclined towards restricting the surplus flow and managing the economic dents, the situation can get worse for the common man. Loans can get costlier with a higher interest rate. In such circumstances, people resort to general lenders to seek loans at lower interest rates.
Stock market indices are insightful
Stock market indices are a mirror of the actual market situation. They clearly indicate how well has the country performed in terms of economic development and business confidence. Any spike or pitfall in the NASDAQ trends shows direct reflections in your investment portfolio. These changes are reflected on a daily basis to give you a fair idea of what is going on in the markets presently and the direction that the economy is headed in. Market enthusiasts keep a close watch on these trends to make the maximum out of these market movements by proactive sale and purchase of assets. This is called timing the market and it requires experience and expertise to catch the flair of unpredictable markets.
There is nothing better than a diversified equity mutual fund portfolio stabilized with investments in commodities and fixed income assets that can help you make the maximum out of the prevailing situation. These investments must be made for the long term in order to reap the best benefits.
To sum it up
A changing economy is a result of several driving factors that work on both the macro and micro levels. The effect can be seen on the nation’s economic development as well as the purchasing power of the common man. It is imperative that with a minor change in the policies, the personal finance strategy of investors gets affected. But making the best out of the prevailing situation is what a robust financial plan must ensure.
Do you need assistance in developing a robust financial plan? Making such a plan is a tedious task. You can reach out to financial advisors for some professional guidance.