Four measures to take care of your money in times of high inflation

If the wave of inflation around the world made the central banks of several countries raise interest rates this year to try to control it, it is possible that their finances are going through a delicate moment —or, at least, a situation of uncertainty regarding to the future.

Higher interest rates make credit more expensive, making it difficult to buy a car or a house, goods that very few people can afford without resorting to a loan.

And in everyday life, those who got used to using their credit card to make day-to-day purchases or cover monthly bills, are now paying much higher interest rates, especially if they fail to pay an installment.

On the other hand, in countries where currencies have devalued against the dollar, consumers are spending more money when buying imported products.

Forecasts indicate that economic growth next year will be lower than the current one, as rising interest rates not only make borrowing more expensive, but also slow the economy.

If economic growth estimates for Latin America this year are 3.2%, for next year they are lower: 1.4%, according to the Economic Commission for Latin America and the Caribbean (ECLAC).

In short, the coming months are likely to be difficult because, at the end of the day, less economic growth translates into fewer jobs.

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

BBC News Mundo, the BBC’s Spanish-language news service, spoke to some personal finance experts in search of tips for managing our money better.

1. Keep calm despite pressure

When a moment of crisis arrives, it is not uncommon for a feeling of anguish or panic in relation to what is happening. This is what happens to those who have a lot of debt or lose part of their income.

“The first thing we should do is take it easy to keep a cool head before making any decision”, suggests to BBC News Mundo Karla Costal, a specialist in personal finance, investments and financial educator at the Mexican website queirodinero.com.

Losing your cool is something that doesn’t just happen to those who manage the family budget. It also happens to small and large investors on Wall Street, the financial center of New York, who rush to sell or buy stocks, being infected by the decisions of other market players.

When times are tough, says Howard Dvorkin, president of US consultancy 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 investments, Dvorkin advises that if the wind is not right, sometimes it pays to “do little or nothing.”

One of the worst scenarios, according to him, is to start selling everything.

“While other people panic, you’ll do well to stay calm. When you live long enough, you learn that neither the good nor the bad last,” he observes.

Whether it’s because you have debts, your salary no longer yields as before, you are afraid of being fired or your investments are falling, the worst mistake is, according to experts, making irrational decisions motivated by the desperation of the moment.

2. How to make a budget from scratch (you can always cut expenses)

To take care of your money, the key is to adjust your budget, explains Melissa Lambarena, personal finance and credit card specialist at NerdWallet.

To do this, you must make a list of your income and expenses — and “identify those unnecessary expenses that you can cut from your budget”.

Perhaps you have a streaming platform that you rarely use, or you’re spending too much money ordering take-out instead of cooking.

There are several ways to budget and, without a doubt, there is no one better than the other: the important thing is to find the one that works best for you.

While some experts prefer to make a simple list of income and expenses, others propose creating multiple columns to provide better mental organization.

It could be the income column, accompanied by another one that says fixed expenses (where everything that cannot be eliminated goes, such as rent, electricity bills, water, gas, transport, internet, telephone, supermarket, medicines, among others) .

And then you add a column with the debts, and a fourth column with all the non-vital things that could eventually be cut.

Some are adept at managing the budget using mobile apps, others think you can make a simple spreadsheet in Excel — and there are those who propose to write the budget by hand on a piece of paper and stick it on the fridge.

The only important thing is that it takes as little time as possible and is easily accessible.

If you’re going through a difficult financial phase and have no idea of ​​your expenses because you’ve never made a budget, the basic thing is to imagine a map (or draw one) that shows where you are and where you want to go, says Costal.

That first step, she adds, will allow you to chart a path to achieving 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, 30% to leisure expenses (such as vacations, buying a new cell phone or going to a restaurant), and the remaining 20% ​​to savings.

Although it sounds good, the truth is that most people allocate a large part of their salary to fixed expenses — and, in many cases, rent alone already exceeds 50% of revenue.

You can then create your own rule with the percentages, so that it is more convenient for you to divide the income between fixed expenses, leisure 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 debt

Suddenly, the day came when your debts piled up.

Maybe you’re paying off your mortgage, a car loan, a bank loan to cover a medical emergency, college credit, and the two credit cards you’ve always used every day.

With so many financial commitments, you can see debt as an almost impossible mountain to climb.

But there are some popular methods of dealing with debt repayment, such as the “snowball” and the “avalanche”.

The snowball method consists of ordering debts from smallest to largest.

The idea is to pay the minimum of all of them every month, and put all the extra money you have into the smallest debt.

When that debt is paid off, you move on to the second smallest, not forgetting to make the minimum payments on the others.

In the avalanche method, you order your debts from the one with the highest interest rate to the one with the lowest.

After you’ve made the minimum payments on all your debts, you use the remaining money to pay off the debt with the highest interest, and so on down to the debt with the lowest interest.

There is also the possibility of combining the two methods. 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 psychological victory faster when you pay off the debt in full.

In the avalanche method, you save money in the long run by getting rid of the highest interest debt first, so it makes more sense from a financial point of view.

There are other alternatives, such as consolidating debts, which means putting them all under one umbrella and starting to pay off a single loan, in which all debts are included at once.

But you have to be careful with this path, and calculate correctly so that the interest on this new consolidated loan is not higher than the interest you were paying before.

Another option is to renegotiate the debt with the bank, ask for term extensions or check if the financial institution offers any other alternative for debtors.

You don’t lose anything by trying.

4. Don’t forget to save (and invest, even if you have little money)

If you’re in financial trouble, and debts have piled up, maybe the saving part seems out of reach.

However, those who managed to pay all their expenses have the mission to save a part, no matter how small.

There are different types of savings. Short-term savings are used to cover expenses such as an upcoming vacation or a new car. It is a specific economy for a certain purpose from the beginning.

Then there is long-term savings, the clearest example of which is retirement.

And the third type of savings is the one designed to have an “emergency fund”.

Experts recommend that this emergency fund be equivalent to three or six times your monthly salary, as it is a personal insurance in case you lose your job or have to face an unexpected health expense.

To start saving, the first step is often the most difficult, notes Jesús Chávez, director of analysis at the National Commission for the Protection and Defense of Users of Financial Services in Mexico.

“Even if it is little money, it is important to save”, says the expert, warning that it is necessary to take some precautions.

“If you keep it at home, that money will lose purchasing power”, he explains. Thus, the best thing to do is to look for instruments that allow you to achieve a return close to the increase in inflation.

If inflation is very high, the recommendation is to look for low-risk options to avoid the devaluation of savings.

Although they are given different names, the common denominator is that you deposit your funds for a period of time and receive the income. As interest rates are high, this could be a good time.

If you decide to seek a bank application or take a chance on the stock exchange, you need to be aware of the fees and any other associated costs you may incur.

And, from a practical point of view, Lambarena recommends saving through an automatic transfer from your bank account.

By doing so, it’s almost impossible for you to forget to save or fall into the temptation of using that money for consumer spending — basically because as it “disappears” from your bank account, it doesn’t pass through your hands.

This text was originally published here.