Economic Trends: How Global Events Impact Your Finances

You may not think that global events affect your personal finances but the truth is they can have a significant effect on your savings, spending ability, and the cost of living. Of course, the events of the last few years have made it more obvious how global events impact your finances.

Inflation

Inflation is a marker of how much the price of goods and services increases over a period. For example, if inflation is at 10%, something which cost $10 a year ago will now cost $11. While you're accustomed to the price of goods consistently rising, the real issue with your spending power is when the inflation rate is higher than your wage increase. For example, a 10% inflation rate increases the cost of everything you buy by 10%. If your wage only increases by 5% during the same period, you won't be able to afford everything that you could a year ago. In short, you'll be worse off.

Governments generally like to keep inflation low. However, it's difficult for them to control inflation. The price of goods rises when they are in short supply. This has been evident in recent years by the decrease in the availability of oil and food, thanks to the Russian invasion of Ukraine. It's pushed prices, and therefore inflation upwards.

Interest rates

Governments and central banks can't directly control inflation. Instead, they use interest rates to help maintain economic growth and minimise the inflation rate. It's a balancing act. Higher interest rates mean it's more costly to borrow money which discourages people from spending. By contrast, low interest rates encourage spending but low interest rates are not good for savers and investors.

The bank will increase interest rates to discourage spending. This reduces demand for goods and effectively lowers inflation. Personally, you'll find borrowing is more expensive and it can be difficult to meet your mortgage payments and other financial commitments.

Economic Downturns

When inflation gets out of control and the bank raises interest rates, the economy will be stifled. Many businesses will struggle. This can lead to job losses. Over time, the reduction in employment opportunities will lead to an economic downturn. You'll directly feel this one as your job will be at risk. Even if you maintain your job, it's likely that you'll have less bargaining power and be unable to command an inflation-matching pay rise. You can stop an economic downturn but you can be prepared by building an emergency reserve which will help you manage during uncertain times.

Market Changes

You probably don't invest in the stock markets or even worry too much about what they are doing. However, the truth is share prices are constantly fluctuating as local and global events affect businesses. This volatility is what investors count on to generate returns on their investments.

However, the volatility also means losses can be made. Those losses can be on pension funds and other investment portfolios. You may not actively manage them, but your pension and other investment savings are reliant on good market returns. Volatility and significant individual events can damage the value of funds and the money you receive in the future. While you may not be able to control market changes, you can monitor them to help ensure your funds are generating the best returns possible.

Protecting Your Finances

Some events are beyond your control. However, that doesn't mean you can't take steps to protect your finances. The following will help:

• Keep up-to-date
  To protect your finances you need to understand what is putting them at risk. That means identifying the latest economic trends and applying them to your situation. It's best to sign-up to a newsletter that will keep you updated about all the latest changes.
• Diversify your portfolio
  If you have an investment portfolio, and you should, then it's time to diversify. By spreading your investments across different areas and different risk rates you'll reduce the likelihood of losing everything. You can even increase your chances of making positive returns.
• Create an emergency fund
  As already mentioned, an emergency fund can help you survive when things get tough financially. Try to put at least three months worth of living expenses aside.
• Reduce debt
  If you have debts they are going to make things harder when the economy goes against you. Start paying them down today and eliminate them as soon as possible.
• Get help
  Don't forget there are plenty of qualified financial advisors who will be happy to help you make the most of your money and be prepared for financial challenges. Just make sure you choose a reputable one.

Summing Up

Local and global economic trends will affect your personal worth. That's the standard of living you can expect when you retire and your ability to purchase things today. It's important to understand how global events can affect your personal finances. This will allow you to monitor the events and prepare as best as possible for them. This is one time when being proactive will pay off.