Personal Finance
Personal Finance
Introduction
The economy of the United States impacts personal finance either directly or indirectly. Importantly, the government regulates personal finance through interest rates and taxes. Most taxes are directed to social programs to help the needy. Due to income disparities, citizens opt to acquire credit cards from local banks or other lenders. The credit card allows consumers to spend in advance and keep track of their expenditure. However, those who settle their credit card balance late, pay high-interest rates. The purpose of this paper is to address the role of government in the personal finance. Also, the paper analyzes the benefits and drawbacks of credit. Finally, I will describe how I will use credit in my financial plan.
1. Role of the government in personal finance
The role of United States Government in personal finance is to regulate money. Importantly, the government is the sole producer of money, so citizens don’t own money. The state releases money into the economy and controls its circulation. Policies of the government can affect personal finance either positively or negatively leading to short-term or long-term impacts.
Madura and Atlantic (2012) holds that the government regulates personal finance through interest and taxes. According to the prevailing economic status, the government may decide to raise or lower interest rates. The high-interest rate has adverse effects on personal finance since individuals are forced to spend more. Also, borrowers tend to suffer from high borrowing interest from financial institutions. Additionally, citizens seem to avoid credits when interest rates are high impacting the financial sector negatively. Conversely, low-interest rates favor personal finance since consumers spend less money on essentials. The government may decide to increases taxes which in turn reduces the income of taxpayers. Citizens react by cutting their expenses and increasing their savings.
Inflation, GDP, and unemployment are some leading economic indicators. The way in which the government deals with these indicators impacts personal finances. Essentially, high inflation minimizes the power to purchase and save. Additionally, inflation directly leads to unemployment (Chang, 1997). Some government policies such as increased taxes and interest rates affect businesses, and directly or indirectly lead to unemployment as shown in figure I.
Figure I: United States: Unemployment rate (2016)
Further, the role of government in personal finance affects the country’s GDP positively or negatively. Regulation of interest rates can either slow or increase the rate of GDP growth.
2. Role of government assistance in personal finance
Some citizens of the United States earn low incomes while a significant percentage faces unemployment. The government has introduced various social programs to assist in personal finance. The social program varies depending on age, disability and the income level of the beneficiaries. The social programs offered by the United States government include;
Social security: beneficiaries of this program include aged individuals, people with disabilities, disaster survivors, and unemployment compensation. General welfare: this help is available to low-income earners who are either blind or old. Also, needy families have access to general welfare assistance. Healthcare spending: the United States government offers Medicare, Medicaid and children health insurance (Sultz, 2013). Education spending: the government, provides grants, loans and other forms of assistance to students. Food aid: as a way of promoting the health of the citizens, the government provides various food aids to the needy. The food aid programs are for women, children, and families who are poor according to the United States Income Guidelines. Public housing: the government offers rent assistance to low-income individuals.
3. Impact tax systems on personal finance
The taxes that affect me at a personal level include federal and FICA. The U.S tax system is progressive; thus, people who have high incomes pay more. The federal policies classify people according to tax brackets. My tax rate is 12.2%, and I fall in the 30% tax bracket. Thus, I pay these taxes to the federal government. FICA taxes are mainly directed to social programs. I usually pay 1.45% towards Medicare from my gross income. Additionally, I pay state tax, which is 3% of my total earnings. A total of 16.65% of my total revenues goes to various taxes. Hence, I have to adjust my financial plan by cutting my expenditure and saving.
4. Economic data
The basic economic data are details that show the economic status at particular periods either past or present. The data can be inflation, income or unemployment rates. Importantly, the data is collected by private firms or government institutions. Additionally, GDP and bank interest rates constitute vital economic data.
This information is accessed from authoritative websites, economic journals, and international financial monitors. In essence, getting raw economic data is challenging; however, secondary sources are numerous and offer reliable information. Websites like The World Factbook and Euromonitor are reliable sources of economic data. Economic data is crucial in decision making. The government can use past economic data to reduce inflation, unemployment rates and introduce workable tax systems and interest rates.
5. Use of credit
The use of credit depends on its period of repayment; there are short-term, intermediate and long-term credits. The Short-term credits that have a period of 1-6 months are mainly meant for essentials such as food, clothes, and shelter. This credit is spent on basic needs since the repayment time is short. Thus, an individual shouldn’t use an amount that is not payable within six months. Intermediate credit can be used for things like vehicles and houses. Long-term credit or loans are ideal for investment in businesses and real estates.
6. Explain the cost of credit
Credit helps consumers spend in advance, and it’s a great way to sustain a personal budget. However, the costs of credit can be undesirable. Late payment of credit usually accrues high interests. If the credit is not settled at the end of the month, the consumer will pay more than the expenditure. Additionally, if a user spends more than his/her income, the interest rates are very high. The underwriting fees for borrowers may be very high especially in periods of inflation.
7. Sources of credit
There are numerous lenders in the United States including local banks, US Bank, and Credit Unions (Truss, 2016). These moneylenders attach different interest rates and terms to their credits. While some lenders offer unsecured loan others, insist on security before providing a loan. Most importantly, secured a loan usually has a low-interest rate. In this case, the lender has exclusive rights over the property offered as security by the borrower. Thus, the lender can sell the property to recover the loan. On the other hand, unsecured loan usually has high-interest rates. A creditor requires the promise that the borrower is in a position to repay the loan. However, a co-signer may be required by a lender before dispatching of the credit.
8. Types of credit that I will use to develop my budget and financial plan
Since I have a poor credit score, I will focus on enhancing it. This way, I can achieve my intermediate objective of buying a car. First, I will open a secured credit card. I will deposit $10000 with the lender who is a local bank. This amount will be my credit card limit, and it’s worthy in building my credit card credibility. Second, I will acquire another credit card for my essentials. I will make sure to pay my credit card balance every month to ensure I don’t pay exaggerated interest. The other credit card is ideal for buying a new car. These budget and financial plan will help me to achieve both long-term and short-term goals.
Federal fund rates are the interest rates at which credit unions lends money held at the Federal Reserve’s to credit unions overnight (Investopedia.com, 2003). The money is only given to trusted institutions since they have to repay overnight. Federal Funds rates influence interest rates in the United States economy since it impacts financial institutions (The Implementation, 2011). Unemployment and Inflation are the indirect effects of the Federal Funds Rates. Ideally, when the rates of Federal Funds are high, only the trusted and credible institutions will have access to loans (Investopedia.com, 2003). Thus, the personal finance will be affected indirectly.
Housing starts Buildings Homes not buying
High-interest rate discourages individuals from borrowing from credit unions and banks. Also, the interest rates discourage the use of credit cards. Hence, personal finance is directly lowered. Building agencies and individuals focus on developing new houses since the costs of the complete houses are high.
Consumer price Index (CPI)
The CPI estimates the change in the price of products and services. The computation of the CPI helps to determine the inflation levels in the economy. Importantly, the prices of goods and services in the United States have been rising as shown in the figure II.
Figure II: Consumer price index (2008)
Gross Domestic Product (GDP)
The U.S. GDP is growing at a lower rate than expected. On the first quarter of 2016, the economy realized a 0.5% growth. This rate was low since economic analysts expected a 0.7% growth (Taborda, 2016). A slow growth of the economy is an indication that citizens have low incomes due to unemployment and inflation. Figure (III) show the US GDP from July 2013 to January 2016.
Figure III: Taborda, (2016)
Dow Jones
The Dow Jones is the average revenue of the companies that form the backbone of the United States economy (Dow Jones, 2016) Thus, the average is a reflection of the growth or decline of the U.S. economic. According to Dow Jones (2016), some of the companies that are featured in the average include electric, gas, cotton and rubber. Importantly, if the stocks of the firms that form the Dow Jones drop, the United States economy also drops.
References
Chang, R. (1997) Is Low Unemployment Inflationary? Federal Reserve Bank of Atlanta Economic Review. <Retrieved April 29, 2016, from < https://www.frbatlanta.org/research/publications/economic-review/1997/q1/vol82no1_is-low-unemployment-inflationary.aspx>
Consumer price index data from 1913 to 2016. (2008). Retrieved May 1, 2016, from <http://www.usinflationcalculator.com/inflation/consumer-price-index-and-annual-percent-changes-from-1913-to-2008/>
Dow Jones industrial average. (2016). Retrieved May 1, 2016, from <http://www.djaverages.com?go=industrial-overview>
Investopedia.com (2003). Federal funds rate. In . Retrieved from <http://www.investopedia.com/terms/f/federalfundsrate.asp>
Madura, J., & Atlantic, F. (2012). Personal finance (5th ed.). Boston, MA: Prentice Hall.
Sultz, H. A., & Young, K. M. (2013). Health care USA: Understanding its organization and delivery (8th ed.). United States: Jones and Bartlett Publishers.
Taborda, J. (2016, April 28). United States GDP growth rate. Retrieved May 1, 2016, from <http://www.tradingeconomics.com/united-states/gdp-growth>
The Implementation of Monetary Policy (2011). The Federal Reserve System: Purposes & Function (PDF). Washington, D.C. Retrieved 1st March 2016s.< http://www.federalreserve.gov/pf/pdf/pf_3.pdf>
Truss, M. (2016). Sources of credit for companies in the United States in 2014, by development stage. Retrieved April 29, 2016, from Statista: The Statistics Portal, <http://www.statista.com/statistics/427174/sources-of-credit-for-businesses-usa-by-type/-by-type/>
United States: Unemployment rate from 2010 to 2020. (2016). Retrieved May 2, 2016, from Statista: The Statistics Portal, <http://www.statista.com/statistics/263710/unemployment-rate-in-the-united-states/>
