An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.
~ Laurence J. Peter (1919 – 1988)
Economics is often called “the dismal science” for its general lack of prediction accuracy. There are lots of other reasons financial experts and non-experts alike detest it. For most laypeople like you and I, it’s incomprehensible and just plain boring. I can understand all of those criticisms.
Still, there must be some value in it if thousands of people study it and governments make policy decisions based on it. Maybe it was never meant to be an exact science anyway. Maybe science itself isn’t always all that exact. After all, we can’t learn anything new without first making tons of potentially erroneous hypotheses.
What economists do best is report on general trends and that information is valuable to everyone. Now I’m not suggesting you wait with bated breath for the release of the Ivey Purchasing Managers Index or the latest GDP report. Just keep an eye on the general trends. Economic conditions can and do affect most areas of your life:
Your income affects every other area of your financial life, so if employment is trending south, you need to be more aware of how secure your job is. More importantly, you need a plan just in case you join the ranks of the unemployed. Even if you’re retired or independently wealthy, employment trends will affect all of the areas listed below.
If inflation is rising, you will notice that you’re paying higher prices for just about everything. Commodities like oil, gasoline, natural gas, metals, fertilizer, orange juice, corn, rice, sugar, coffee and many more trade every day and major changes in trend are eventually felt by consumers.
Interest rates have an effect on many aspects of personal finance, including what you will pay if you are in debt, and what your bank will pay if you give your savings to them. In fact, numerous economic variables combined over the past couple of years to make us briefly question the very idea of putting money in banks at all. (Your money is probably safe there, but it doesn’t hurt to brush up on the latest CDIC or CIPF information.Gail Vaz-Oxlade recently posted on this subject.)
Obviously, economic factors like GDP, employment, retail sales, interest rates and inflation have a huge affect on all types of investments. Stocks, bonds and real estate will move in relation to all of these factors.
Whether you are currently retired or just aspiring to be so, economic cycles will have a profound affect on your decisions. If you are close to retirement with a portfolio heavily weighted toward equities and a stock market crash occurs, you may not have enough time to recoup your losses. Unfortunately, lots of people are in that boat after last year’s credit crisis. If interest rates are very low (as they are now) it will be much harder to find safe investments that yield enough to provide you with stable income.
Your Quality of Life
All of the points above deal exclusively with financial factors, but one of the central themes of this blog is that financial factors affect many other areas of our lives. Financial problems can cause or add to relationship, health, or anxiety issues.
If you truly find economics intolerable, that’s OK. But once in a while take a look at the business headlines to get a general idea of what’s happening. Follow the cockroach theory but don’t panic either. If you see signs of potential trouble on the horizon, you don’t need to make drastic changes. But you might want to look for parts of your financial life where you are exposed and reduce risk in those areas.