Achieving a balanced personal economy goes beyond having more income than spendings. Since the ability to save also plays a fundamental role.Financial Health is first, and not only in the field of medicine.
In the economic sphere, being in good financial health is crucial to avoid greater evils. You should be able to face unforeseen events. As the popular saying dictates: prevention is better than cure.
But what is personal financial health? Would you know how to check your accounts? Find out if your figures are healthy and how you can improve your financial situation. Follow these tips:
Alberto Blanco, professor at the Institute of Stock Market Studies (IEB), defines the meaning of financial health:
“If we simplify a lot, the concept consists of replicating the model of any company. In other words, it would be a matter of entering more than what is spent.”
It is the search for a balance between the money that comes in and goes out.
Budget, the ally of your accounts
Regardless of income, you can achieve healthy finances. The starting point should be the preparation of a family budget. One of the main mistakes people make is not knowing their real economic situation.
Making a budget is simple. The National Distance Education University (UNED) recommends that it be carried out with all household members. You just need paper and pencil. Also, use simple computer programs such as Excel, apps as Fintonic.
The steps to be taken are as follows:
You must specify the usual monthly income. (payroll, other types of income, passive income, aid…) Also, fixed expenses (receipts, mortgages, loans, education …). And finally, foreseeable in the short term (the purchase of school materials.)
After collecting the information, you will know if there is a surplus. If there is, you should create an emergency fund to cover any unforeseen event. The UNED recommends it be between three and six months of fixed expenses. And they must be associated with the home.
After those two previous steps, you will know if you have the ability to save. This will allow you to:
- plan retirement
- invest in order to obtain profitability, or
- take out some insurance.
There is a wide range of options suitable for each risk profile in the market. An advisor may be helpful when choosing.
Percentages and savings
Arnold Pérez is a professor at EAE Business School. He argues that to achieve personal financial balance it is necessary to apply the 50/30/20 rule. Each figure corresponds to a percentage. It should be allocated:
- 50% to cover basic needs and fixed expenses
- 30% to cover personal expenses
- 20% for savings
Now it all depends on income. “This formula could be fulfilled without problems by those people who receive between 2,500 and 3,000 euros per month.” he acknowledges.
“If the payroll is 1,000 euros, it will be necessary to adjust your lifestyle. If more is spent, there will be a loss. Your savings must be compensated with debt. there is no other way.” He warns.
To improve the family budget it is convenient to examine the debts acquired. Good credit management will increase living standards.
The keys are as follows:
- Pay within the established period to prevent interest from skyrocketing.
- Do not accumulate loans. Request those that are really needed.
- Take advantage of the fact that the Euribor is at historic lows. Reduce the mortgage with contributions.
- Take into account the joint cost. Commissions, equivalent annual rate (APR), management or study expenses …
The CNMV and the Bank of Spain – good, bad and very bad debt:
- Good debt. It is associated with the purchase of a home or other property.
- Bad debt. It is acquired for things that are not really needed. (the purchase of a new television – or a repayment term that exceeds the life of the financed product). For example, continuing to pay for a vacation two years after.
- Very bad debt. Loans with a very high APR. Overdrafts on account, credits at ATMs. Fast credits or deferred payments on cards.
The recommendations to achieve good financial health are:
- Control your expenses so that you reach the end of the month without problems.
- Save more
- Reduce or eliminate debt
- Prepare for retirement. (Find out here: How much you will have when you retire if you start saving today)
- Protect your family.
Regarding savings, consider the establishment of objectives of high importance. Avoid generalities.
“Don’t think -I want to live well after I retire-. Think -I want to accumulate 90,000 euros in my pension plan before I turn 50-“.
“A financial objective must be concrete achievable and limited in time.” “Consider saving as paying yourself”, clarify the supervisory bodies, which also recommend “not waiting to take the first steps; since even the smallest amount will contribute to the achievement of your aspirations, especially if we have the time factor ”.
The Financial Education Plan has developed a simple and didactic guide to check the financial health of each person with the help of the Financial Services Authority (FSA), the supervisor of the UK markets. In it, questions are asked that must be answered by the interested party, such as age, employment status, if they live alone or with a partner, if they have children, if it depends on the income of the person they live with, if they have a mortgage, if you are going to retire soon, or what would be your situation in case of becoming unemployed, among others.
Depending on the answers, a diagnosis is obtained and based on this a series of recommendations are received. “If the evaluation gives many reasons for concern, do not despair. It is not necessary to attack all problems at once. You have to concentrate on those that are considered most urgent and deal with the rest later, ”they advise.
Also, being in good financial health today does not mean that you will be tomorrow. The Financial Education Plan suggests carrying out a periodic check-up to adapt it to the personal circumstances of each moment. For example, a couple with a mortgage and school-age children will have more fixed expenses than a retired couple, and their aspirations will also differ.
Most banks have also designed tools and formulas to help families manage their money. Some options would be digital piggy banks or savings by rounding, as well as making periodic contributions so that saving is easier, more flexible and without your pocket noticing it.
In times of crisis like the current one, there is a tendency to save more money. It is a question more associated with fear and caution than with a desire in itself. The latest data provided by the Bank of Spain on household deposits at the end of July show a historical maximum of 892,800 million euros, 7.13% more than the same month last year, and this despite the fact that the period coincides with the summer season, which is when you tend to spend more.
However, it is important that this type of saving, which accumulates due to a sharp drop in consumption, is largely used to boost the economy. “Saving becomes an investment in companies and that creates jobs. You have to take great care of this aspect ”, says Arnold Pérez.
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