Macroeconomics at Home
by Gary Foreman
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Getting Your Financial House in Order
Every semester thousands of students groan at the thought of taking a class in economics. Often, their introduction to economics will be in a course about macroeconomics.
According to InvestorWords.com, macroeconomics is "The study of the behavior of an economy at the aggregate level, as opposed to the level of a specific subgroups or individuals (which is called microeconomics). For example, a macroeconomist might consider the industrial sector, the services sector or the farm sector, but he/she will not consider specific parts of any of these sectors. Factors studies include inflation, unemployment, and industrial production, often with the aim of studying the effect of government policy on these factors."
So why is that important to you, the average Jill or Joe who's trying to pay your bills, put your kids through school and save a little for retirement? Today we're going to spotlight some macroeconomic concepts and principles that can make it much easier to accomplish your goals.
Part of macroeconomics is studying long-term trends. We also need to be aware of the long-term financial forces that will affect our family, such as inflation. Even in the best of times, most economies have a mildly inflationary tendency. Prices may only go up 1% or 2% per year, but that's quite a bit if you take it out over 30 or 40 years.
Knowing the "macro trend" leads you to certain conclusions. First, your money needs to grow by more than the rate of inflation. It's no good earning 1% on your money if inflation is running 3%.
Inflation will also tell you that it's better to own your own home than to rent your entire life. Why? Because the trend in home prices is generally up. Every property is different so you need to choose carefully. But the overriding trend says that the home you buy today will be worth more in thirty years if it's reasonably well maintained.
Or consider that college education or retirement that you're planning. According to Finaid.org, the cost of college has gone up just about twice as fast as the general inflation rate. From 1989 to 2005, inflation averaged 2.99% per year. College prices went up 5.94%. So the macroeconomic lesson is to make sure that your long-term saving plan takes into account prices increases in the things that you'll buy eventually.
Two other macroeconomic trends have a very practical affect on your life. Both good and bad. It's become clear that machines are capable of doing more work that people used to do. And that the amount of global trade will continue to increase.
The good news is that both of those things tend to reduce prices for you and me. Machines tend to work for less than people, and having companies from around the globe competing to see who can sell you new shoes for less will mean a lower price for you.
But the bad news is that both of these trends will reduce the number of jobs available and how much those jobs pay. We won't get into the politics of the issue. That's not our mission. But we will look at what you can learn from the macroeconomics involved. Both trends are clearly established. And, neither shows any sign of being reversed. So it's important to recognize facts and adjust our lives appropriately.
If you're doing work that could be done by a machine or your employer's main competitors are foreign, you need to evaluate whether your job is safe or not. Be realistic. It's easier to face (and handle) bad news now. Ignoring it could mean a much bigger problem later. There are studies available showing the future prospects for various professions. Find a career that has a good forecast. Don't get caught on the wrong side of a macroeconomic trend.
Another way to look at macroeconomics at home is to evaluate the "big ticket" items in your budget. What big things dominate your finances? For most of us, it's housing, transportation and food. As a general rule, you can't spend more than 75% of your after-tax income on these three areas combined.
The good news here is that you can do something about it. Don't let a real estate agent or car salesman talk you into making commitments that you can't afford. According to Bankrate.com, about 40% of new car buyers owe more on their old car than it's worth. Last time out, they were talked into buying too much car. Know how much of your budget goes to these items and make any needed adjustments.
One final note for the real economists reading this. I've intentionally taken some liberty in how we used the term macroeconomics. Our goal wasn't to provide a formal economics lecture. Rather I wanted to show how people who weren't trained in the field could benefit from the concepts and knowledge that the field of economics studied.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
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