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Managing Your Personal Finances A good understanding and practice of interest rates, demand and supply helps an individual to nullify the ill effects of the economy.

By Dr. Mahesh Agnihotri

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This article was co-written with Dr. Wilson Gachiri, Assistant Professor, Skyline University College, Sharjah.

Life is all about making ends meet. This is particularly true in case of a common man with a meagre income to meet his family expenses. Needless to say, everyone is engulfed in the vagaries of economy. A good understanding and practice of interest rates, demand and supply helps an individual to nullify the ill effects of the economy.

This article is an attempt to show the importance and impact of interest rates, demand and supply and inflation in our daily lives and in the days to come. Interest rates are the rates charged for the use of money. Bank charge interest rates for advancing loans. Interest rates fluctuate anywhere and everywhere. Demand and supply are interdependent in any economy for that matter. Whilst inflation is the increase in value of goods and services over time. Although these two terms/concepts affect every one, rich or poor, old or young, males or females, but in this write-up, the focus is restricted to the following companies/organizations:

1. Producers/manufacturing companies

2. Stock markets

3. Colleges and Universities

4. Real Estate Holdings


Producers make products depending on the demand assessed by them for their products. All the factors of production used by these producers are subjected to demand for and supply and interest rates prevailing in the market. The financial resources used by them are also subjected to the interest rates and inflation tendencies that in turn again depend in the demand for and supply of funds in the financial market. Important factors of production or resources available to individuals and companies determine income and expenditure patterns. Labor, for example employed need to be remunerated depending on the demand and supply of labor in the labor market.

Rent for the building used for business, also is subjected to the demand for such building and supply of the same. The raw material they purchase are available in the market depending on the demand and supply of the same. Demand and supply hence dictates the final price of the products whereas interest rates and inflation determine the availability of the resources and price stability of the products. When producers fix prices of their products on the above two factors of demand and supply and interest rates, the consumers and the general public are affected as well. The mantra for a common man is to keep an eye on the interest rates, likely to go up or down or anticipate the likely demand and supply of the products they plan to buy. Both in the short term and in the long run.

Stock markets

Stock markets behave on the announcement of interest rates by the Central Bank or Federal Bank. The moment financial markets receive the news that the interest rates have changed, the stock prices also react soon. A signal to either invest or dispose the stocks and shares. There is an inverse relationship between bond prices and interest rates. The demand for and supply of funds directly depends on the interest rates.

Even the stock prices depend not only on the interest rates but also on the demand for and the supply of the same. The mantra therefore is to wait for the interest rates to fall to invest in bonds, and sell when the interest rates have gone up to book the profits. With regard to the equities, the same principle can also be applied.

Colleges and universities

In the existing education industry scenario, the owners of the colleges and universities expect more and more students to join their institutions. In view of the perfect competition, their revenues in the form of fees depend on the number of other colleges and universities existing in the region. This goes well for students as well, as they have an opportunity to join other colleges and universities.

The prospective employees looking for employment in these colleges, can expect their jobs and the remuneration on the basis of the number of candidates are seeking employment and the number of vacancies available for the same position. The mantra for students, is to take up the programs which have a great demand in future. This requires understating of the job market which includes the demand for and supply of lucrative positions.

Real estate

Investing in real estate has been proven to be the best way to cushion against inflation cycles. When planning for future expenses for example retirement, the financial lifestyle desired in the retirement years depends on first, the financial and assets accumulated over the time. Secondly, how fast the spending on those funds are during retirement. In cases where inflation rates are above 3% it could be an indicator of worse things to come and thus concrete investments should be taken to insulate against drop in ones purchasing power. As is in previous decades, there is a high probability that inflation rate is more likely to rise over the next several decades than it is to fall.

Some costs for example education expenses are likely to increase while others like healthcare expenses ultimately increase as one advances in age. Steps should be taken to protect one's finances just in case the inflation rate rises depleting the acquired assets at a faster rate than had been planned. Investing in real estate provides the next best alternative as a buffer against the expected price shocks. Returns from real estate have been shown to appreciate over time when compared to other financial assets.


It can be stated that the interest rates can make a difference in the borrowing habits of the human beings, particularly the common man, whether it is a case of buying a home or a car or an iPhone. A good anticipation of the demand and supply of the major items and the interest rates likely to follow will enable a common to thwart the vagaries of the economy. Inflation as observed is one of the financial facts of life.

Since it is in most cases difficult to control and predict its impact in the long term, it is not only important to recognize and be aware of inflation but also crucial to take steps in protecting your finances just in case the inflation rate rises unpredictably. Investing in property or real estate provides a hedge against unanticipated inflation in the long term.

Related: A New Generation Of Islamic Finance Experts Is Required In The Middle East

Dr. Mahesh Agnihotri

Associate Professor, Skyline University College, Sharjah