Maybe you haven’t given it much thought before, when the news broadcasts talk about the state of the economy. About inflation, recession and depression.

Maybe you thought that it only matters to the people on Wall Street, the Government or owners of large corporations. But that is not the case.

Read on to find out how it affects you, and why you should care about the economy.

The Economy and Your personal finances

Many people have a poor relationship with their own money, but it’s not entirely their fault.

Schools do not teach kids basic finances, and at home many parents do not feel prepared to convey great lessons about spending, savings and investment to their children. Share on X

Because of this lack of information, many people end up getting their hands dirty and turning their financial lives into chaos. 

Therefore, everyone needs to start learning about money, work, and get a sound financial education. Most people who have a job are paid with money. So, regardless of the type of work you do, you will need to learn how to use it.

In this article, we will explain few of the key economic concepts to make your aware of the process and how it affects your financial life.

Do you know what inflation is?

In economic terms, inflation happens when the prices of goods and services increases, in a general and constant manner.

This decreases the value of money, so that you have to pay more for certain products than you did before.

The National Consumer Price Index helps to measure the inflation levels in the country. By applying the necessary measures to manage these levels, we can ensure that there is no unnecessary increase.

Do you know why inflation happens?

There are two main factors that determine inflation:

• Increased price of raw materials. The producers that depend on these raw materials are looking for a way to continue with the same profit margin. This generates an increase in the prices of the products they make.
• The law of supply and demand. When there is an increased demand for products or services, which goes beyond the production or import capacity, prices will increase. Short supply, plus high demand, equals higher prices.

For example, if drought or flooding causes crops of barley to fail, there will be less barley, but the demand will still be the same. Which means that the demand for that product will be higher than the capacity to produce it. This inevitably leads to higher prices.

The Link between inflation and recession

You may think that inflation is something that should be avoided. After all, nobody wants to pay more for what they need. But some inflation is necessary for the economy to continue growing in a balanced way. Share on X

Too much inflation in a short space of time, is called hyperinflation. This is where the cost of goods and services seem to have run amok. Where money is devalued at an alarming rate. If this continues for a long time, it could lead to a recession.

What is a recession?

When we hear the word recession, we relate it to questions of macroeconomics. We do not always associate it with economic factors that will negatively influence our personal finances.

To understand recession, which is the sign of an unstable economy, we must first compare it to a stable economy.

Economic stability is the result of the virtuous combination of internal and external factors of our economy:

• Internal factors
  Sustained employment growth 
  Food self-sufficiency 
  Balanced economic budget 
  Internal market satisfaction
• External factors
  Demand for goods and/or services due to their quality  
  Dynamic and balanced commercial exchange 
  Demand for services and facilities for quality tourism 
  Specialized customer service

The fewer the indicators of a stable economy that are present, the more vulnerable the economy is to fall into a recession.

These are the factors which may cause a recession:

• Shortage of raw materials 
• Difficulties in accessing technologies and equipment 
• Uncompetitive prices of local products 
• Lack of continuous training of operational personnel 
• Inadequate supervision 
• High tariffs 
• Protectionist policies

When the economy is leaning towards a recession, you will see more of these risk factors play out.

Recession, WORK and Buying Power

In a recession, all productive factors are affected equally: companies, workers and consumers of goods and services will all suffer to a greater or lesser degree. Share on X

The measures that can be implemented to deal with a recession are often painful:

• Dismissal or reduction of the workforce, as less demand for products means they are no longer needed to keep the company running.
• Decrease in production, with the consequent loss of competitiveness and attractive prices.

The more jobs that disappear, the higher the unemployment rate is, the more likely we are to enter into a recession. So the steps that companies take to stay afloat may help them, at least in the short term, but hurt the overall economy.

Unemployed people do not have the same buying power, and so the demand for goods and services decline. This in turn means that companies will reduce their output, and cut their workforce even further.

If this cycle continues unchecked, it may lead to greater economic upheaval. Because a strong and lasting recession causes a depression.

Main effects of the recession on your personal finances 

In a recession, you may not be able to afford things you normally take for granted. And your access to loans and credit may be restricted.

This could also mean that you are unable to pay for an education, which further limits your ability to find work.

If you lose your job during a recession, finding another could be difficult. Without an income, you will be unable to pay your bills.

And if you have a mortgage, you may have to sell your house because you can no longer afford to pay for it.

So, a recession is bad news for your personal finances and work life.

How to survive a recession

• Keep an eye on your expenses, and reduce them wherever you can.
• If you have debts, create a debt management plan and talk to the bank/credit companies about reducing the monthly payments.
• Keep your job (if possible)
• If you lose your job, start your own business to keep money flowing in OR go back to school. A better education may help you find a new job.

• Need cash quick? Avoid taking on more credit and loans. Sell what you don’t need (or can’t afford to keep) instead.
• Get involved in your community. If you should need help or a new job, chances are greater of getting it if you expand your network. People are more likely to help and hire people they already know and trust.
• Stay open and positive. Opportunities exist even in a recession.