If inflation has been a wave that runs through the world this year and central banks have raised interest rates to try to control it, it is possible that your finances are facing a difficult moment or, at least, a situation of uncertainty about the future .
Higher interest rates make credit more expensive, making it more difficult to buy a car or a house, products that very few people can buy without a loan.
And in everyday life, those who have become accustomed to using credit cards to make daily purchases or cover monthly bills are now paying much higher interest rates, especially if they leave an unpaid installment.
On the other hand, in those countries where their currencies have devalued against the dollar, consumers are spending more money to buy imported goods.
Economic forecasts suggest that next year economic growth will be lower than the current one, since the increase in interest rates not only makes loans more expensive, but also slows down the economy.
If the economic growth estimates for Latin America this year are 3.2%, for next year they are lower: 1.4%, according to ECLAC.
In summary, the next few months are going to be difficult because in the end, less growth translates into fewer jobs.
How can you protect your money in the midst of this economic storm?
At BBC Mundo we talked to some personal finance experts so they could give us their advice on how to better manage our personal finances.
1. Keep calm despite the pressures
When a moment of crisis arrives, it is easy to fall into a situation of anguish or panic about what is happening. This is what happens to those who have many debts or lose part of their income.
“The first thing we must do is be calm to have a cool mind before making any decision,” Karla Costal, an expert in personal finance, investment and financial educator at the Mexican site queridodinero.com, tells BBC Mundo.
Losing your cool is something that doesn’t just happen to people with their family finances. It also happens to small and large investors on Wall Street who rush to sell or buy by becoming infected with the decisions of other players.
When times are tough, says Howard Dvorkin, president of US consulting firm Debt.com, “we feel powerless in the face of all the bad economic news, so we often make mistakes with our money by making sudden or emotional moves.”
If you have some investments, Dvorkin advises that if the wind is against you, sometimes it pays to “do little or nothing.”
One of the worst scenarios is to sell everything, he explains.
“While other people are panicking, you’ll do well to stay calm. When you live long enough, you learn that neither the good times nor the bad times last,” he says.
Whether it’s because you have debts, your salary isn’t as good as before, you’re afraid you’ll be fired or your investments are falling, the worst mistake is, experts say, making irrational decisions motivated by the desperation of the moment.
2. How to make a budget from scratch (and you can always cut expenses)
To take care of your money, the essential thing is to modify your budget, explains Melissa Lambarena, personal finance and credit card specialist at NerdWallet.
For that, you have to make a list with your income and expenses and “identify those unnecessary expenses that you can cut from your budget.”
Perhaps there is a streaming platform that you use little, or spend a lot on ordering food online instead of cooking at home.
There are different ways to make a budget and certainly none is better than another: the important thing is to find the one that works best for you.
While some specialists prefer to make a simple list of income and expenses, others propose creating several columns to have a better mental order.
It can be the income column, accompanied by one that says fixed expenses (where everything that cannot be eliminated goes, such as rent, electricity bills, water, gas, transportation, internet, telephone, supermarket, medicines, and others). .
Then add a column with debts and a fourth column with all the non-vital things that could eventually be cut.
Some are in favor of managing the budget using applications on your phone, others think that you can make a simple Excel spreadsheet and others propose to write the budget by hand on a piece of paper and stick it on the refrigerator.
The only important thing is that it takes as little time as possible and is easily accessible.
If you’re going through a rough patch financially and have no idea about your spending because you’ve never budgeted, the basic thing is to imagine a map (or draw one) that shows you where you are and where you want to go, says Costal.
“The map helps you identify where you are standing, what is your current situation and what are your goals.” That first step, she adds, will allow you to chart a path to reach your financial goals.
Another tip that can help you is to divide the budget into three parts, following the 50/30/20 rule.
Allocate 50% of your salary to fixed expenses, the other 30% to leisure expenses such as vacations, buying a new phone or going out to a restaurant, and the remaining 20% to savings.
Although it sounds good, it is true that most people allocate a large part of their salary to their fixed expenses and that, in many cases, only income is greater than 50% of income.
You can invent your own rule with the percentages that best suit you to divide fixed expenses, pleasure expenses and savings.
Debts can be included in fixed expenses or, if you prefer, you can classify them as a separate criterion.
3. How to make a plan to pay off debts
Almost without realizing it, the day came when your debts accumulated.
It may be that you are paying the mortgage on your house, the car loan, the bank loan to cover a medical emergency, the university loan, in addition to the two credit cards that you have always used on a day-to-day basis.
Overwhelming, right?
With so many financial commitments, you may see debt as a mountain that is almost impossible to climb.
There are three popular methods of dealing with debt repayment: snowball, avalanche, and blizzard.
The snowball method consists of ordering the debts from smallest to largest.
The idea is to pay the minimum on all of them each month, and put any extra money you have on the smallest debt.
When that debt is settled, you move on to the second smallest, without forgetting to make the minimum payments on the others.
With the avalanche method, you order your debts from the one with the highest interest rate to the lowest.
After making the minimum payments on all debts, you use the remaining money to pay off the debt with the highest interest, and so on until you reach the one with the lowest interest.
The “blizzard” method combines the two. You focus on one or two of the smallest debts first, and then move on to the debt with the highest interest rate.
The snowball method does not seem to be the most recommended, but it has a great advantage: you get a faster psychological victory by paying off the debt in full.
With the avalanche, instead, you save money in the long run by getting rid of higher-interest debt first, so it makes more sense from a financial perspective.
There are other alternatives such as consolidating the debts, which means putting them all together under the same umbrella and starting to pay a single loan where all the debts are included at once.
But you have to be careful with this path, correctly calculating that the interest on this new consolidated loan is not higher than the interest you were paying before.
And the other thing is to renegotiate with the bank, request term extensions or explore whether the financial institution offers any other alternative for debtors.
Nothing is lost by trying.
4. Do not forget to save (and invest, even if you have little money)
If you are having financial problems and debts have accumulated, perhaps the savings part seems unattainable to you.
However, those who have managed to cover all their expenses have the mission of allocating a part, however small, to savings.
There are different types of savings. Short-term savings are used to cover expenses like the next vacation or a new car. It is a specific saving for a specific purpose from the beginning.
Then there is long-term savings, where the clearest example is retirement.
And the third type of savings is that intended to have an “emergency fund.”
Specialists recommend that this emergency fund be equivalent to three or six times your monthly salary, because it is personal insurance in case you lose your job or have to face an unexpected health expense.
To start saving, the first step is usually the most difficult, says Jesús Chávez, director of analysis of the National Commission for the Protection and Defense of Users of Financial Services, Mexico.
“Even if it is little money, it is important to save,” says the expert, but warns that certain precautions must be taken.
“If you keep it at home, that money will lose purchasing power,” he explains. So, the best thing to do is to look for instruments that allow you to achieve a return that is close to the increase in inflation.
In the particular case of Mexico, Chávez recommends investing in Federation Treasury Certificates (CETES), issued by the Mexican government in pesos.
For those who live in other countries, if inflation is very high, the recommendation is to look for low-risk options to avoid the devaluation of savings.
Although they go by different names, the common factor is that you deposit your funds for a period of time and receive a profit. Since interest rates are high, this may be a good time.
If your decision is to look for a bank instrument or take a risk on the stock market, you must pay attention to the commissions and any other associated costs that you may incur.
And from a practical point of view, Lambarena recommends saving through an automatic transfer from your bank account.
By doing it this way, it’s almost impossible for you to forget to save or to give in to the temptation to use that money for a consumption expense, basically, because since it “disappears” from your bank account, it doesn’t pass through your hands.
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BBC-NEWS-SRC: https://www.bbc.com/mundo/noticias-63549359, IMPORTING DATE: 2022-11-17 09:10:06