How Macroeconomics Can Help You Reach Financial Goals

by Gary Foreman

What could an economics class teach you about your personal finances? We explore how these lessons can help you achieve your financial goals.

According to Investopedia.com, macroeconomics studies the various phenomena that impact the economy. These phenomena may include price levels, national income, rate of economic growth, inflation, and changes in unemployment – all things that impact your finances.

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 achieve your money goals.

What You Should Know About Inflation and Rising Prices

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. “Between 2009-10 and 2019-20, published in-state tuition and fees at public four-year institutions increased at an average rate of 2.2% per year beyond inflation.” (source: CollegeBoard.org) That means that college prices have increased a more than general inflation. So the macroeconomic lesson is to make sure that your long-term saving plan takes into account price increases in the things that you’ll buy eventually.

Related: How to Minimize 4 Risks to Your Retirement Savings

What You Should Know To Protect Job Security

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 multinational companies will place plants in countries with low labor costs.

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, although global trade may slow, lower labor costs are always attractive to manufacturers. 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 multinational, 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.

What You Should Know About Keeping Big Ticket Budget Items in Check

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 Edmunds.com, during the pandemic, the average amount of negative equity in autos was $5,571. So for many people, they owe more on their 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.

• Economics and Your Personal Finances
• 7 Steps to Financial Security
• The Smart Way to Compare Financial Options
• Using Opportunity Costs to Live a Happier Life
• Choosing the Best Savings Strategy for Your Financial Goals

Reviewed June 2022