March 26, 2023

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Experts share 4 tips to take care of money in inflationary times and uncover the worst mistakes being made.

If inflation is a world-shattering wave this year And central banks try to control interest rates by raising them. Your finances are likely to face a tough time Or, at least, uncertainty about the future.

High interest rates make borrowing more expensive, making it difficult to buy a car or a home that few can afford without credit. And in day-to-day life, people who used credit cards to make daily purchases or cover monthly bills, now They pay more interest, especially if they leave an unpaid installment.

On the other hand, in countries where their currencies depreciate against the dollar, Consumers spend more money on imported goods. Economic forecasts suggest that economic growth next year will be lower than the current one, as rising interest rates make borrowing more expensive but also slow the economy. If economic growth estimates for Latin America this year are 3.2%, next year they will be lower: 1.4%, according to ECLAC.

In short, the next few months will be difficult because ultimately, lower growth translates into fewer jobs. How can you protect your money in the midst of this economic storm?

How can you protect your money in the midst of this economic storm?Shutterstock

In BBC Mundo We spoke to a few personal finance experts to get their insights. Advice on how to better manage our personal finances.

When a moment of crisis arrives, it is easy to fall into a state of anguish or panic about what is happening. This is what happens to people who have multiple debts or who have lost part of their income.

“The first thing we should do before taking any decision is to be calm”Personal finance, investments and finance educator at BBC Mundo Carla Costa, Mexican base Dear money.

Losing your peace is something that doesn’t just happen to people with their family finances. Investors big and small on Wall Street rush to buy or sell, influenced by the decisions of other players.

When times get tough, says Howard Dworkin, president of US consultancy Debt, “We feel powerless in the face of all the bad economic news, so we often make money mistakes by making sudden or emotional moves.”

Staying calm is one of the most important steps
Staying calm is one of the most important stepsFreepik

If you have some investments and the wind is against you, sometimes it will “do little or nothing,” advises Dvorkin. One of the worst-case scenarios is selling everything, he explains.

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“When others are panicking, you better be calm. “When you live long enough, you learn that good times and bad times don’t last,” he says.

Because you have debts, your salary isn’t paying you as much as it used to, you’re afraid you’ll get laid off or your investments will collapse. The worst mistake, say experts, is to make irrational decisions driven by the desperation of the moment.

Adjusting your budget is essential to taking care of your money, explains Melissa Lambarena, personal finance and credit card expert at NerdWallet.

For that, Make a list with your income and expenses and “Identify unnecessary expenses that you can cut from your budget”. Maybe there’s a streaming platform you use less, or you spend more on ordering food online instead of cooking at home.

There are different ways to budget, and of course none is better than the other: The key is to find what works best for you. Some experts prefer to create a simple list of income and expenses, while others propose creating several columns to get a better frame of mind.

Make a list with your income and expenses
Make a list with your income and expensesFreepik

Fixed expenses (everything that cannot be removed like rent, electricity bills, water, gas, transport, internet, phone, supermarket, medicines and others) can be an income column. .

Then add a column with debts and a fourth column with all the unimportant things that can be reduced in the end.

Some advocate managing the budget using apps on your phone, others think you can create a simple Excel spreadsheet, and others suggest writing the budget by hand on a piece of paper and sticking it on the fridge.

The only important thing is that it takes as little time as possible and is easily accessible. If you find yourself in a bad financial moment, you have no idea about your expenses because you never budgeted. The basic thing is to imagine a map (or draw it) shows where you are and where you want to go, says Kostel.

“The map helps you identify where you stand, what your current situation is, and what your goals are”. That first step, he adds, will allow you to chart a path to achieving your financial goals.

Another tip that may help you is to divide the budget into three parts The 50/30/20 rule. 50% of salary should be reserved Fixed costsOther 30% is like pleasure expenses holidayA purchase New phone or going to a restaurant, the remaining 20%, at savings.

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While this may sound good, the reality is that most people spend a large portion of their salary on their fixed expenses, often accounting for more than 50% of their income. You can find your own rule with the percentages that work best for you to divide fixed expenses, pleasure expenses and savings. Debts can be included in fixed costs, or if you prefer, they can be classified as a separate item.

Remembering and writing down your expenses is an important step
Remembering and writing down your expenses is an important stepFreepik

Almost without realizing it, the day came when your debts piled up. In addition to the two credit cards you use every day, you pay off your home mortgage, car loan, bank loan for medical emergencies, and university loans.

Great, right? With multiple financial responsibilities, You can see debt as a mountain Climbing is almost impossible. There are three popular ways to pay off debt: Snowball, Avalanche and Blizzard.

method of snow ball It consists of ordering loans from smallest to largest. Pay the minimum amount each month, and put any extra money you have toward smaller loans.

Once that debt is settled, make sure to make the minimum payments on the others and move on to the second smaller one. with Avalanche mode You order your loans from highest interest rate to lowest.

After paying the minimum amount on all the loans, you use the remaining money to pay off the loan with the highest interest rate, until you reach the one with the lowest interest rate.

method of “Snow Storm” Combine the two. You should focus on one or two smaller loans first, then move on to loans with higher interest rates.

The snowball method may not seem highly recommended, but it has one big advantage: you get a quick psychological victory by paying off the debt in full. With Avalanche, instead, You save money in the long run by eliminating high-interest debt firstSo, it makes a lot of sense from a financial point of view.

There are other alternatives, such as debt consolidation, which means putting them all under one umbrella and starting paying off one loan where all the debts are added together.

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But you have to be careful in this path, you have to calculate correctly that the interest on this new consolidated loan is not more than the interest you paid earlier. Another one Re-negotiate with the bank, request extensions or investigate whether the financial institution It provides borrowers with some other alternatives. Nothing is lost by trying.

You can almost see debt as a mountain.
You can almost see debt as a mountain.Freepik

If you have financial problems and accumulated debt, perhaps the savings area seems out of your reach. However, those who are able to cover all their expenses should set aside a portion, however small, for savings. There are different types of savings. Short-term savings are used to cover expenses such as the next vacation or a new car. It is a specific savings for a specific purpose from the beginning.

And then there’s long-term savings, where the obvious example is retirement. And the third type of storage is intended to be a “Emergency Fund”.

Experts recommend that this emergency fund be equal to three to six times your monthly salary, as it is personal insurance in case you lose your job or face an unexpected health expense. To start saving, the first step is usually the most difficult, says Jesus Chavez, director of analysis at Mexico’s National Commission for the Safety and Security of Users of Financial Services.

“It’s important to save even if it’s a small amount”, says the expert, but cautions that certain precautions should be taken. “If you keep it at home, that money loses purchasing power,” he explains. then, The best thing is to look for tools that allow you to achieve one Near rising inflation.

In the specific case of Mexico, Chávez recommends investing in federal treasury certificates (CETES) issued by the Mexican government in pesos. For residents of other countries, If inflation is too high, it is recommended to look for low-risk options Avoid devaluation of savings.

Don't forget to save (invest even if you have little money)
Don’t forget to save (invest even if you have little money)Freepik

Although they go by different names, the common factor is that you deposit your funds for a fixed period of time and earn profits. With interest rates high, this could be a good time. If your decision is to seek a banking instrument or take a risk in the stock market, You need to pay attention to the commissions and other related expenses that you incur.

From a practical point of view, Lamperena recommends saving by making automatic transfers from your bank account. By doing so, It’s almost impossible for you to forget to save or give in to the temptation to spend that money on consumptionBasically, because it “disappears” from your bank account, it never ends up in your hands.

* By Cecilia Baria

BBC Mundo