Economic Conditions and Its Affect on Personal Financial Planning
Current economic conditions also affect your personal financial decisions and how economic conditions can influence financial planning. There are three important economic conditions: 1. Consumer prices, 2. Consumer spending, 3. Interest rates
Consumer Prices
Over time the prices of most products go up. This rise in the level of prices for goods and services is called inflation. During times of rapid inflation, it takes more money to buy the same amount of goods and services. For example, if the rate of inflation is 5 percent, then a computer that cost $1,000 a year ago would now cost $1,050 if the computer price increased at the inflationary rate.
The main cause of inflation is an increase in demand without an increase in supply. For example, if people have more money to spend because of pay increases or borrowing, but the same amounts of goods and services are available, then prices will rise.
Inflation can be especially hard on certain groups, such as retired people whose income may not increase. The inflation rate affects consumer prices and varies from year to year. In the early 1960s, the annual inflation rate was between 1 and 3 percent. In the late 1970s and early 1980s, the inflation rate climbed to 10–12 percent each year. More recently it slowed to 2–4 percent each year.
Consumer Spending
A consumer is a person who purchases and uses goods or services. You are a consumer whenever you buy anything—a CD, books, clothes, lunch, or even a haircut. Consumer spending affects the economy by helping to create and maintain jobs. When people buy more goods or services, companies have to hire extra employees to meet the demand. This situation leads to a higher rate of employment, making more jobs available. More people work, and they have more money to spend. However, when consumers buy fewer goods and services, companies have to produce less and lay off workers. Then unemployment rises, making jobs harder to find.
Interest Rates
Like everything else, money has a price, and this price is called interest. Interest is the price that is paid for the use of another’s money. Interest rates also affect the economy. When you deposit your paycheck in a savings account, the interest you receive is money the bank or another financial institution pays you for the use of your money. The bank, in turn, uses your money to make loans to people who want to purchase items such as houses, automobiles, and new businesses. Borrowers who receive the loans must pay a fee, or interest to the bank or lending institution.
Interest rates represent the cost of money. When consumers increase their savings and investments, the supply of money that is available for others to borrow grows, and interest rates go down. When consumers borrow more money, the demand for money increases, and interest rates go up.
Interest rates on loans also rise during times of inflation. Interest rates will affect your financial planning, whether you save, invest, or obtain loans. The amounts of earnings you receive from your savings account or the interest you pay on a loan depend on the current interest rates. Interest rates are just one facet of the economic factors that influence your personal financial planning.