ECONOMICS is the study of choice given scarce resources. As human beings, we may have unlimited needs and wants but we are brought back to Earth by the reality that we just have limited resources.
Within the context of personal finance, prudent decisions have to be made to maximize our utility given our available budget. We regularly read about economics in the news but many may often fail to see the relevance of the economic terms and economic trends in daily living.
There are five economic terms that can matter.
The first term is gross domestic product or GDP. It is the comprehensive measure of the total market value of all currently produced final goods and services within a country in a given period of time by domestic and foreign-supplied sources. Simply put, GDP can be viewed as the “national bibingka.” Our leaders try to grow GDP consistently over time. A healthy GDP growth rate can send positive signals that economic opportunities abound in the country and that it would analogously be a good time to invest.
GDP is made up of personal consumption expenditures, investment spending, government spending and net exports. Each component of GDP is dynamic and can significantly determine how GDP progresses. All economies go through cycles. When GDP grows, it would be a good time to spot specific opportunities in the economy in terms of what sectors or industries to invest in. When GDP declines, it may be a good time to evaluate personal finance goals and conditions to assess what we need to continue, stop or start doing.
The second term is “Price.” It refers to the amount of money that is charged for goods and services in a market economy. Inflation is when there is a sustained increase in price over time. Deflation is when there is a sustained decrease in price over time.
Monitoring price is vital.
When prices fluctuate, we may need to evaluate how we handle our needs and wants. When prices fluctuate, we may need to evaluate where we invest. For financial success, our investment returns must outpace the inflation rate to grow wealth.
The third term is “Unemployment.” It refers to the part of the population that would not currently have a job but are currently looking for a job. A low unemployment rate can mean that the economy is doing well in terms of matching skills with requirements.
A high unemployment rate is a major cause of concern. Therefore, it is advised that all individuals, especially those who are breadwinners, should have a sufficient emergency fund and also insurance so that they are prepared in case job loss or job challenges occur.
The fourth term is “Interest Rate.” From the point of view of a lender, it is the income derived from lending money. From the point of view of a borrower, it is the cost of borrowing money. Usually, the T-bill rates are used as the bellwether in determining interest rate movements.
High interest rates may mean that it would not be a good time to borrow money whether for personal consumption or investment purposes. High interest rates may mean it would be a good time to divert funds to interest-bearing instruments.
The fifth term, which is quite popular for an economy like the Philippines is, “Remittance.” This refers to the transfer of money by a foreign worker to an individual in the home country. The World Bank estimates that the Philippines is the third-top remittance-receiving economy and that remittances contribute around 10 percent to total GDP. Overseas Filipino workers are not ATM machines. Remittances must be managed well. A portion can be used to deal with the present but a portion must be used to provide for a better future.
Economics and personal finance are indeed complementary. Personal finance will not work if it is done in isolation. Awareness of the external environment with respect to economic terms and economic trends will help individuals make good money decisions. Failure to do so will lead to high opportunity costs.
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Gemmy Lontoc is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 79th RFP program this October 2019. To inquire, e-mail info@rfp.ph or text <name><e-mail> <RFP> at 0917-9689774.