Abacus Wealth Management

Basic Economics Knowledge and Your Money.

Today,in a world that has increasingly become sophisticated,almost everything does not make sense in the eyes of man.It is for this reason that  understanding,whether basic or in depth,of things that are part of our lives are emphasized on.For instance money,how much of your understanding of  it can you lay claim?Say the economics that comes into play and influences on the change on money value,demand and supply.

Now, I know very few people who would stand any talk to do with economics,most of the times the conversations would be flagged as boring. But take a moment and look around you and you’ll realize economics has a lot to do with many things that affect you directly or indirectly not just your money. In fact, adjusting your investing habits to counter certain economic factors could be what helps you to save that extra coin,avoid losing money or invest in something with good returns. So what does economics have to do with you?Lets take a look at economics that has to do with inflation and interest rates and your personal finance. 

Inflation and Interest rates

Most times we’ve had business disrupted in the central business district due to protests triggered by rising cost of living. Something that can be attributed to the rate at which the general prices of goods and services have risen over a given period of time. An economist calls this rise in prices inflation. Quite Often,it would be due to demand pull factors or cost pull factors. The most common trigger of inflationary pressure in Kenya is normally the rise in oil prices that has a ripple effect on almost all the prices of most goods that depend on it from production to distribution.

Since it can have a serious impact on your purchasing power,inflation is important to monitor for the sake of budget adjustments.A cut down on the expenses you can do without for some time would be necessary.Some financial advisers would recommend adjusting your spending as per the percentage of inflation.Currently, our inflation is at 7.7% though most economist would prefer an inflation at 2%-3% we can’t be doing that bad considering we hit a double digit inflation of 31.8 % in 2008,the highest so far.

Though cutting on spending on quantities of  certain commodities during inflation is normally the most immediate practice to cushion against eroded purchasing power,inflation normally has far reaching consequences on Fixed income investments which would require informed foresight to counter. Something investors with an eye on the bond market need to be keen on. For instance when a nominal interest rate of  12% is adjusted for inflation that stands at 15% the real interest rate is a disappointing negative 3%. Would you consider that a good investment? A good investor should be wary of such risks and such a scenario would then favour investment in equities which make a better bet against inflation.

Inflation can also erode the value of your savings overtime.What Ksh 100,000 can do for you today is not what it could for you in the 80’s. Does your bank offer the best rates for their savings accounts? Or lets say you intend to save for a investment that would cost you around Ksh 1,000,000 in 5 years you’d need to adjust your savings to the changes in inflation overtime if you’re to meet that financial goal otherwise you’ll fall short.

Bring up CBK interest rate that currently stands at 16.5% and the question of the right time to borrow from your bank  then you realise just how important this basic economics knowledge is.First you would need to understand CBK interest rates adjustments and their effect on the interest rate offered by commercial banks.Downward adjustment would favour borrowing as it is cheaper than when the rates are adjusted upwards when saving is more favoured.This will in turn help you make informed decisions on your  saving borrowing and spending.Also,when you’re shopping around for a bank that’s fair. What of it’s effects on asset prices ? Would higher interest rates favour alternative investments to housing and equities and what would be the overall effect on prices?

Interesting,most people would rather evade any bit of news that touches on these two factors but could they be what you miss when making financial decisions to do with saving,spending and borrowing?

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