Friday Finance – Factors that affect our finances

Welcome to the third installment in our financial discussion. If you’re just joining us, be sure to check out one and two!  Today we’re going to talk about Factors that affect our finances. Basically there are two types of factors – factors that are out of our control and factors we have an influence in or some control over. This is actually the first post in a two part post (as it was just a little too much to post at once…) Today we’ll be discussing financial factors that are out of our control.

What is out of our control?

*First, the economy is out of our control. I’m sure many of us in the past few years have wished we could just push a button and fix the economy. Doesn’t work that way, unfortunately! There are cycles in the economy:

  • Expansion – Production and sales are up, Unemployment and interest rates are low(er). (We all love this phase!)
  • Recession to Depression – Production and sales are down, Unemployment and interest rates are up. (Basically not a happy time…)
  • Recover – Production and sales start to improve, as well as unemployment rates. Interest rates may start to lower as well. (Getting better, but sometimes it is hard to see!)

To make good financial decision, you will need to know both the current state of the economy as well as where it is projected to be in the next few years. For example, we know a couple who bought a house just before prices bottomed out, so they owe more for their house than it will appraise for now (not a great situation to be in). Whereas, once my husband got a full time job, we decided to buy sooner than later as the market seems to be picking up in our area currently and we wanted to get in before prices became higher again (it may take a while it may not, but buying now was still not a bad decision.)

*The Second factor we can’t control is Inflation. Inflation is the steady rise in the general level of prices (deflation is falling of prices). As inflation goes up purchasing power goes down, unless income rises with inflation. However, sometimes inflation rates are increase more than income (definitely not a happy time!)

Inflation projections are made by the US government’s Office of Management and Budget (OMB). Economists and private organizations also make them. As with the economy, it helps to know the future direction of inflation in order to make informed financial decisions. Do I do this, not really. I do try however to keep up with how the economy is doing in my area.

*Third, we cannot control interest rates. They flow with the economy. It is definitely a good idea to know how the economy is doing and whether is is rising or falling.

Knowledge about interest rates can show us the true cost of borrowing money. (I’m about to enter into an explanation with lots of words and numbers… basically it says that paying interest can be bad because it costs us extra.)

If I were to buy a couch that cost $1,000 today on my credit card with a 13% interest rate and paid it off before the end of my billing cycle I would pay 1,000 for that couch. Plus I would get reward points/cash back – approximately $10 – so my true cost is $990. However, if I bought the same couch and only paid my minimum payment (let’s say it was $25 every month, which may not be true as some require interest and 1-5% of the balance for the minimum payment. To make it easier, it’s going to be  $25 each month) then I’d pay on that couch for 53 months and would eventually pay $1317.83. But I would still get my $10 rewards. So my total cost would be: $1,307.83. My couch then cost me $317.83 more than it was priced. I don’t know about you, but when I look at those numbers I think of all the things I could buy with $300 extra dollars!!

You can also do this with long term payments – such as a mortgage. There the numbers are much greater! In fact if I pay the actual payments each month and don’t pay extra, I’ll be paying about $100,000 in interest over 30 years. However, if I made just one extra payment each year I’d save about $18,000 in interest over the course of the loan and pay it off about 2 years early. You can use a Mortgage Early Payoff Calculator and find out for yourself how much you can save (I just searched for it and found one or two I liked.)  Honestly I love seeing how much I can save if I am willing (or able) to pay a bit of extra money. That said interest for things such as Mortgages and Student Loans are better than credit cards (may are tax deductible and are an investment. Plus the interest rate is typically lower -below 6% vs above 10%.)

*Fourth, we cannot control taxes. I’m not going to get into a great discussion about taxes right now. It’s something we have to pay at all levels from stores to state to national, and we don’t really have a say in them.

You assignment this week – look at your credit cards, mortgage, student, car loans and see what the interest rate is. Typically Mortgage, car and student loans should be lower. Evaluate which of your credit cards has the best interest rate.

Also – keep tracking your spending.

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