Lesson 1 - Financial Planning - Part 4

Economic Trends

Unfortunately, we don’t live with an Economy that is perfectly predictable.  Luckily, there are some important trends and cycles that are likely to continue in our economy. 

Inflation will always be an important factor in the short and long term financial planning.  Inflation doesn’t change your money but it can change how much something will cost in the future.  100 dollars might not seem like much now, but in the 1920’s, 100 dollars had the equivalent of almost 1000, in today’s money.  This effect is called Purchasing Power.

Business Cycles often happen in our economy.  Each time there is a recession people will be impacted by this cycle.  People and Families might experience layoffs, reduced or stagnant incomes and other cutbacks.  It is important for us to note these persistent cycles throughout our history so that we can better prepare for when one does happen.  For example, we can protect ourselves from downtrends in the cycle by building a reserve of wealth to allow us to survive the cycle.

Instable Financial Markets are something that many of us often hear about in the news or through other media.  The crash of the 2000’s, the tech bubble, the housing collapse, etc. are all pointers that our financial markets can be very unstable at any moment.  There is always a risk-return trade off in any financial market, how we plan to invest our money will help us to ensure that we are not risking to much when we shouldn’t be.

Taxes are another important economic trend.  We can always be assured in our economy that we will pay more in taxes and the tax laws themselves will continue to become more complex.  It is important that we focus our attention on parts of the tax law that will provide us with monetary incentives to do something.  For example, in 2000 you want to buy a new car, but you find that the tax code will allow you to save an additional 5000 dollars in 2001, what should you do? Delay the purchase?  These are all questions that we must keep in the back of our mind when we start the planning process.