Personal Finance

Is understanding economics important to personal finance?

This week, I was on the Monday Money Panel for Alberta Primetime again. This week, we were given some economic reports and asked to comment on the statistics to help people get a sense of what the economic future might look like.

In this post, I would like to share with you some of my candid thoughts on studying economics and how it relates to personal finance.

Data spin

“The First Law of Economists: For every economist, there exists an equal and opposite economist.
The Second Law of Economists: They’re both wrong.”

Now I love statistics but I also know that stats can be very misleading. A lot of the data presented is the averages or means but what does that really tell you. It’s like the example of putting your right foot in burning hot water and your left foot in freezing cold water, and expecting that the average temperature is reasonable. Does that mean you are going to enjoy the comfort of the average of 2 extremes? Absolutely not! You are going to feel pain and discomfort in both feet.

When I talk to Canadians on the street, I’ve meet some people who have been hit hard by the economic slowdown. I also know many people that have not felt the effects at all. We try to paint a picture for everyone or the average or the mean but remember everyone is different and unique.

Economics is about the past

“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”

NONE of us can control or predict the economy with any degree of accuracy. It’s impossible. It makes for good media and good debates and interesting conversation (which I am all for) but after reading 8 economic reports for different economic statistics all saying different things, I’m sincerely, no smarter than before I read the articles. I’m just more confused!

Economists are always trying to use past data to “FORECAST” the future. The problem, of course, is it is rarely accurate and economists are always “REVISING” their forecasts.

Focus on what you can control

Here’s what I tell people over and over again! Focus on what you can control!

As important as economics is to the world, the problem with the average person is it’s something we have a difficult time understanding and more importantly, it’s something we cannot predict or control. We go to great lengths to try to predict the future but in the end it never works (consistently).

Debt levels have risen to record levels. One report said while debt levels have risen to record levels so have financial assets. The problem is debt is constant but out financial assets are “yo-yo-ing” because we have more money in the stock market, real estate and commodities that go up and down. It’s OLD BORING ADVICE but we have to make sure people manage their debts, pay them down and strive to be debt free.

I suspect people who are mortgage free and debt free were less affected by the economy than those with lots of debt (regardless of how much assets you had). Debt affects cashflow. Debt affects stress. Debt affects net worth. Debt affects everything financial.

Everything goes in cycles

The economy, just like everything else, goes in cycles. When times are tough, the pessimists will be touting all the reasons you should hide under a rock. When times are good, we all tend to get a little over-confident with the future outlook.

We live in a world of extremes because normal is boring and this is definitely true when it comes to economics. We’ve just gone through a period of extreme lows with respect to the economy, stock market and interest rates. Rest assured that the picture always improves from the lows. In fact it already has improved significantly. The problem is we never know when it is going to happen.

One might argue that today things are normal. What was abnormal was the boom and then the crisis. Don’t wait for the economy to improve or interest rates to fall or the stock market to increase. You can’t do anything about these things. Instead focus on what can make you wealthier . . . Work on your earning power, lowering your debt levels and controlling your spending. These are the things within your control!

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