Families must have financial literacy to manage their debts, optimize their income and investments and, ultimately, improve their standard of living
In a market economy, the prices of goods and services vary every year and this affects living and consumption habits. If prices generally and constantly rise, we are entering a period of inflation. In other words, with every euro we buy fewer products.
Inflation gradually erodes the value of money and the standard of living of middle-income families. Changes in some prices are more important than others. When calculating the average increase, we attach more importance to the prices of the products that make up a large part of our costs. They are those of energy, food and mortgages.
Over the past 30 years, there have been three paradigmatic financial falls:
-The bursting of the real estate and financial bubble in Japan, causing real estate prices to fall sharply (1989-1990).
-In 2000-2001, when the dotcom bubble burst. This term refers to the end of the growth period of the economic values of the first technology companies at the turn of the century.
-In 2008, due to the global collapse of the real estate sector after the bursting of the subprime bubble.
What recessions teach us is that for some there is an opportunity for enrichment.
An asset is a financial resource of value that a person possesses that generates benefits over time. Assets can be bonds, mutual funds, stocks, real estate income, or intellectual property.
On the other hand, liability is an expense that does not bring in money. They are the material goods and the daily expenses of social survival: cars, house as dwelling, clothes.
High-income people borrow money from banks and invest it in assets. Middle-income people, on the other hand, ask for money to buy debt and go into debt over time.
The rich buy assets, the poor only have expenses, and the middle class buys liabilities assuming they are assets. To improve their financial plan, families need to develop their financial intelligence. Most people do not have basic financial education and this is a fundamental subject that should be included in the European education system.
This family will live with the following cash flow and payment priorities: 1, 2, 3, and finally, if applicable, 4. An optimal financial plan should follow the payment order of 1, 4, 2, and 3, prioritizing what generates money (assets) and not what remains (liabilities).
Keep in mind that there are several ways to feed the asset column to improve purchasing power. Let’s take an example: we have an apartment with a mortgage and we are putting it up for rent. Once the mortgage, property charges and taxes have been paid, an investment return of up to 3% of the total investment per year can be expected. It may seem like an interesting investment, but if there were another, better positioned asset (stocks, for example) that yielded more than 3% monthly on the same investment, it wouldn’t be as interesting.
Flat investment 100,000 euros. 100,000 x (0.03) = 3,000 euros.
Investment shares 100,000 euros. 100,000 x (0.03 x 12 months) = 36,000 euros.
The point is that investing is risky if you don’t know the subject. Investment capacity and knowledge of accounting, markets, supply and demand and the law are required. Hence the importance of financial education.
Today, the conditions of access to real estate credit are less flexible than before the crisis of 2008. For this reason, the profile of a middle-class family with an open-ended contract, due to its low risk, is the ideal mortgage client taking into account , in addition to , who will pay interest for about 30 years.
In recent times, there has been a change in the consumption of interest rates by borrowers. Customers prefer to rent a fixed interest rate. It can sometimes be more expensive, but increasing social, economic and political uncertainty allows you to avoid major risks over the life of the loan.
According to the INE, 72.7% of those who apply for a mortgage to pay for a home choose a fixed rate, compared to 27.3% who prefer the variable rate. This results in an increase in long-term debt.
In 2021, the debt of middle-income families increased, partly due to lower interest rates. According to the INE, 96,609 mortgages were signed in the first quarter of 2021.
But record numbers were reached in the same quarter of 2022 as a total of 116,100 mortgages were registered. Despite the fact that interest rates and maturities have started to rise, the number of mortgages has increased by 16.8%.
This scenario confirms the need for financial education so that families know how to manage their debts, optimize their income and investments, and ultimately improve their standard of living.
This article was published in ‘The conversation
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
