“How the government actions might affect your personal finances?”.
This is a question that crosses the mind of every person at some point. The governments worldwide have taken actions to reduce the deficit and to minimize their debts.
These actions have included raising taxes, cutting spending, and printing money.
The question is, will these actions have a negative or positive impact on your personal finances?
The answer is that it depends on how you manage your personal finances.
In this article we show you ways in which the governments actions might affect your personal finances and how you can prepare yourself for any eventuality.
Before we beging, let’s go over some basic questions.
Why do governments take their actions?
Many governments will try to stimulate the economy if it is in recession.
They might cut taxes or increase government spending. The goal is to encourage people to spend more.
What is an economic crisis?
The term “Economic Crisis” is used to describe a period of time when many businesses fail, most people lose their jobs, and the value of almost all investments falls.
What is a recession?
A recession is a decline in activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and wholesale-retail trade.
A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion or boom.
What is a depression?
Depression is a severe economic downturn that lasts several years. It is much more severe than a recession.
The difference between recession and depression is that during a recession, the economy will begin to recover and bounce back, while during a depression, the economy will continue to decline.
What does “deflation” mean?
Deflation is a decrease in the general price level of goods and services.
Deflation results in a decrease in the purchasing power of money — and the value of most investments — over time.
What does “inflation” mean?
Inflation is an overall increase in prices and fall in the purchasing value of money.
Inflation erodes your purchasing power. If inflation is high enough, it can wipe out your savings.
What is hyperinflation?
Hyperinflation is an extremely rapid period of inflation during which prices increase by at least 50% per month.
When many prices double every day, it’s possible to go from a bank account balance of $10,000 to $5,000 to $2,000 in a single day.
Ways in which the governments actions might affect your personal finances
Government Increases Spending
This is known as fiscal stimulus.
In this case, the government increases its spending and borrowing.
This means more money in the hands of the government which can be used to spend on social services, defense, or even transfer payments to the states.
The government spends more and collects more taxes as well. This means that you will receive more money from the government.
For purposes of this example, let’s assume that you are a government employee and you earn $10,000 per month. Your expenses are $3,000 so you have $7,000 left for savings and investment after payment of monthly expenses.
If the government engages in fiscal stimulus, your income may increase per month because of the extra spending in social infrastructures by the government.
You can see that in this case, your personal finances benefit because of fiscal stimulus.
Government cuts spending
This is known as fiscal austerity.
In this case the government reduces the spending and cuts down on the borrowing.
This can be achieved by reducing the spending on social services, defense, or even reducingthe transfer payments to the states. This means that the government is spending less and thus collecting less taxes.
Less taxes mean less money for the government to run its affairs. Less money means that the government has to borrow money to meet its monthly expenses.
You can see how this affects your personal finances. Let us say that you are a salaried employee and you earn $10,000 per month. You have the following expenses:
House Loan: $1,000
Car Loan: $500
Student Loan: $500
Credit Card Payments: $500
Total Monthly Expenses = $3,000
This leaves you with $7,000 after payment of monthly expenses.
If the government acts in a fiscal conservative manner, your income will be reduced by $1,000 per month. This is because the government will not be spending as much money, which means they will collect less taxes and thus will not be able to pay you as much as they used to.
Thus you can see that in this case, your personal finances are negatively affected because of fiscal conservatism.
Deficit Reduction Initiative/Program
When the government spends more than it collects in taxes, it must borrow money to cover the difference.
The government does this by selling U. S. Treasury bonds to individuals, businesses, and foreign governments. When an individual purchases a Treasury bond, he or she is lending money to the government.
The individual receives interest payments from the government each year on the amount that he or she has lent to the government.
Because the government must pay interest on its loans, it must raise taxes or borrow more money every year to pay the interest on its existing debt. The government’s need to raise taxes or borrow more money each year is called the deficit.
These actions may affect your personal finance by leading to a reduction as you have to pay the cost of increased taxes.
As mentioned above, the government may increase the taxes for several reasons including deficit reduction.
Raising taxes or borrowing more money to pay for any amount of government spending is called deficit financing.
This often happens when the government spends more than it earns. To make up for this deficit, the government may choose to implement a number of economic interventions to safeguard the economy.
One of these interventions is increasing taxes. While this may ngatively impact your spending power and earnings, it often contributes to economic stability which in the long-term is good for your personal finance.
Interest Rate Increases
Interest Rates are defined as the cost that someone or an entity pays for borrowing money.
The Federal Reserve sets a target for the federal funds rate, which is the interest rate that banks charge each other for overnight loans.
The Federal Reserve does this to maintain price stability and to promote maximum employment and economic growth.
One entity of the Federal Reserve is the Federal Open Market Committee (FOMC) that is responsible for determining interest rates in the country.
If the government, through the central bank, wishes to regulate inflation or deflation, monetary policies like increase of decrease of interest rates are implemented. Increase of interest rates reduced money supply by compelling lending facilities like Banks to deposit theur funds and ultimately reduce their borrowing from the Central Bank.
Similarly, if the central bank wants to increase the supply of money in the economy, they might reduce interest rates thereby creating a conducive envrionment for spending and borrowing.
There are numerous government actions that can affect your pesronal finance. While some of these actions may reduce your personal reserves while others may increase them, these actions are foten implemented to promote economic growth and improve stability.