4 Things you MUST know about the economy

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From the European crisis, to high unemployment rates and frequent tax increases, understanding the economy can sometimes be quite difficult. Whether you are a job-seeker, a thriving professional, a student or an entrepreneur, here are 4 things that impact our everyday lives you should know:

  1. You may end up poorer than your parents: If you are working, the chances are part of your salary is deducted by the government for your retirement. However most countries use a PAYGO system. This means that the money you contribute is actually given to current retirees and your retirement will be funded by future generations. The problem is that people are living longer and are having fewer children. So today’s young people may not have enough money for their retirement.
  2. Looking for a job? Unemployment is a chronic issue: When companies are facing a drop in revenues because clients and business partners spend less, they tend to cut costs. This can mean downsizing the staff and limiting hiring to experienced professionals who can solve problems from day one. Consequently new graduates have a harder time being placed and jobs that are available on the market may not get filled because they require special skills job-seeking people do not have. This is called structural unemployment.
  3. Credit is not wealth: If you borrow a dollar from me to buy a house and agree to pay me back the dollar in a year with interest, in the simplest case I make money on the interest. In a more complex system, I can go to John, and convince him to give me one dollar and 50 cents in exchange for YOUR promised future payments. I just made a profit of fifty cents by selling something I never had. But if for some reason you can’t pay me back and the house loses its worth, the total of your loss, mine and John’s is greater than the initial dollar you borrowed.  That is a fraction of the 2008 financial crisis.
  4. The main reason countries are in recession is because of their debt: Countries, just like people, have revenues and expenses. The balance needs to be zero or positive for the economy to be healthy. Revenues come from taxes you pay, exports and investments. Expenses come from project financing (e.g. infrastructure, hospital and housing), social assistance (e.g. Medicare, employment insurance and welfare), employee salaries and imports. Interest paid on borrowed money is another important expense. So when a country spends more money than it earns, eventually the negative balance will be unsustainable and government will have to borrow more money to pay for everyday expenses. Credit will become more expensive to get, the currency will depreciate and the deficit will get worse. The vicious cycle never ends.

In light of this, here are some tips you can do to avoid being a victim of things out of your control:

  • Limit your personal debt to the minimum
  • Stay informed about the economy and the job market
  • Start a small business on the side to be less dependent on your job.
  • Save money and avoid living beyond your means.
  • Invest in assets that appreciate. This includes property, bonds and commodities.
  • Elect local representatives who favor small businesses and financial regulation.

 

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