Understanding Economics and How it Could Impact My Family’s Finances

Most American families are confronted with news and issues surrounding the economy on an almost daily basis. But I must admit, it is easy to let big words and unfamiliar terms fly over my head. As it turns out, I am far from being alone.

A 2010 study published by Pew Research Center reveals what anyone might expect: the majority of the American public is aware of basic facts regarding the economy and politics, but struggle with specifics and applied understanding. It’s important to note just how much the economy affects day-to-day life, and that includes family’s finances for today and the years to come.

Lifestyle changes

Some of the most crucial economic health indicators, such as Gross Domestic Product (GDP), employment rates, consumer price indices, and currency strength, have a direct implication on the way American families live. A high GDP, or the aggregate value of all goods and services produced in the country over a year, generally indicates higher spending and incomes. The everyday experiences and quality of life can be further made clear by the other aforementioned economic indicators as well.

Currency strength, in particular, relates to the value of the US dollar, which has a drastic impact not just on foreign exchange trading, but also on the American lifestyle by way of its effects on businesses and prices. FXCM explains that the government’s strong dollar policy has kept the US dollar fairly high compared to its other counterparts, which have kept prices on imports low and foreign investors interested. In turn, families feel this policy’s effects in inexpensive foreign goods and more affordable overseas travel.

In general, however, a booming economy means more jobs and more income for majority of Americans, which can translate to lifestyle changes for the better. This can mean more meals dined out, clothing, and a more comfortable financial situation for families across the board.

Investing and business opportunities

Another impact of a healthy economy is that families tend to have additional opportunities and incentive to invest in their own retirement and mutual funds, an important topic explored in a previous post here on Surviving Cents. Aside from these, families would also be more inclined to invest in stocks or foreign exchange, or even their own businesses. Because jobs and income are on the rise, families would not only be earning additional money to invest, but they would also have more confidence in the systems that are bolstering economic growth.

On the other hand, an economic recession – or the slowing down or general decline of the GDP – will have the opposite effect of thwarting family investments. In a recession, family budgets might be stretched thin over even basic necessities and daily expenses, so families will often put investing and business opportunities on hold. In more severe cases, they might also be forced to tap into existing investment accounts and retirement funds for cash.

Savings and expenses

Family savings and expenses are greatly influenced by economic health as well. The Week reports that personal savings rates dropped to just 3% today as compared to 12% in the 1970s, with nearly half of all Americans ill-equipped to address a $400 emergency, should anything bad happen. This drop is largely the result of several economic factors, such as stagnating incomes, skyrocketing prices, and dismal interest rates on savings accounts.

Moreover, unhealthy economies influence lead families to reduce entertainment, dining, and extracurricular activity expenses because there’s less money to go around over all. During the great recession of the late 2000s, many families have to make drastic changes to pre-recession lifestyles, with some families still struggling to get back on their feet today.

For better or worse, the economy has a variety of powerful effects on families. The financial implications discussed above don’t even touch the social and psychological effects of recession on families, which the Pacific Standard discusses in detail. Indeed, a better understanding and appreciation for economic concepts and indicators can bring a great deal of discernment when it comes to financial planning and investments. It helps families maximize economic upturns and weather through slumps.

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