You invest money to earn a return. A basic understanding of how the overall economy of the country affects how well your investment will produce that return is helpful in making investment decisions.
“Investing 101,” a basic how-to book on putting your money to work, by Michele Cagan, is designed to help beginners. In the first chapter, she describes the elements of basic economics.
Investing is directly tied to the state of the economy. If consumers are spending money and the economy is growing, that’s a good time to invest. If money isn’t flowing into the basic economy, the returns are likely to be poor.
What makes the economy boom? Consumer spending and corporations prospering generally equal investments growing. Consumer spending, in fact, is the greatest contributor to the gross domestic product that keeps the economy flowing. And consumer spending, in turn, reflects other factors, such as the job market, inflation and others.
Investors who pay attention to the overall state of the economy will be more successful. Those most in the know can look ahead a little and create their investment strategy accordingly.
Today’s economy is enormously complicated and volatile. With 7.5 billion people sharing a world where information is instantaneous and interaction constant, making an educated guess about the economy at any given time is a challenge. Knowing the basics is one way to increase your chances.
Buying and selling are at the root. People buy things they value. Sellers base their prices on the perceived value of their products. Prices fluctuate based on demand. For instance, most Americans are currently paying less for gasoline than they did a few years ago. That’s partly due to complicated international factors that regulate gas production, but also because people are using less. The basic rules of supply and demand apply. If the supply increases, prices fall; if demand increases, prices rise.
Income is a major factor. You receive income from jobs, inheritances, investments, etc. Ideally, individuals learn to live within the income on which they can rely. Life changes can affect your income. For instance, retirement, which can reduce the sources on which you have traditionally relied. Wise saving and investments can help replace the lost work income.
Consumption, or how much of your resources you spend to live, makes a huge difference. If you consume more than you accrue in income, there is trouble ahead. Keeping a balance is the way to avoid debt and other issues.
Savings and investments are vital to meet emergencies and to provide for retirement. In the 1960s, Americans saved 6 to 10 percent of their income. The figure has seriously declined until few Americans have the same cushion. Many have zero resources to fall back on when they need it. Saving some money and, ideally, making it work by wise investing is the solution.