Healthy finances means dealing with both money and your emotions

Do you want end the year in the black and save money? For this to happen, you need to manage your money well and know how to control your emotions.

Arte: Ale Kalko

 

According to a survey conducted by Brazil’s Credit Protection Service and National Confederation of Shopkeepers, saving money is the main goal of Brazilians for 2018. Almost half of the people interviewed (45%) claimed they intended to save money this year, while 27% said they want to get out of the red (27%). Despite this, according to another study by the same organizations, few Brazilians started the year prepared: only 15% confirmed they could afford to pay the usual annual bills at the beginning of the new year, like IPTU (property tax), IPVA (vehicle tax), and school materials.

It is true to say that the economic crisis faced by the country and high unemployment hamper many people’s saving plans. However, it’s important to realize that, regardless of the situation, having clear goals, self-knowledge, and self-control is essential for keeping your personal finances in order. And this means thinking about your life, choosing priorities, and controlling spending. So it’s not only about spreadsheets, calculations and interest rates, but also dealing with your own emotions.

 

SELF-KNOWLEDGE

To start the financial “detox” process and enter a virtuous circle, first and foremost, you need to think about your lifestyle: what is your outlook on life and are you making the best use of your time? What are your preferences, personal tastes and values? When we know what is important to us our aspirations cease to be “fleeting whims” and become concrete facts of our biography. What would once have been a simple desire becomes an option, a conscious choice. Knowing just where you want to go is an essential element of effective financial planning.

Next, you need to draw up a “map” of your finances, which includes your earnings, spending and assets. It is time to face up to life the way it is: don’t fool yourself and conduct a meticulous assessment of your real financial situation.

Make a list that makes sense to you (see table below) and monitor your budget on a regular basis. This helps us think of the acts we carry out mechanically, “without thinking”, and realize what is essential.

Make sure you include “minor monthly expenses” as well as the monthly bills, such as water, electricity, and telephone. When it comes to money, the size of the expense is irrelevant. For example, we might complain about our children’s monthly school fees and make small “silly” purchases throughout the month on impulse which, when added up, cost more than the school fees.

Having a list of your monthly expenses helps visualize the household budget not only from a spending point of view, but also through the prism of savings, thus helping to assess your income and outgoings and figure out what changes in your consumption habits will make the difference in the pursuit for financial health.

DECISION AND ACTION

Having an overall view of your income and outgoings helps you plan your finances so you can set aside enough money to pay the debts and/or save. It’s time to define your goals and plan how much and where to save to meet them. Work out how much you need to save each month and how long it will take to save the amount you need to set aside to meet each goal. In this way you can define a strategy based on your priorities.

However, good intentions are not enough – you must make your decisions and act upon them. But be careful not to exaggerate: make sure your plans are feasible. Do you have the time and wherewithal to perform the actions you envisage? Make sure they are not just based on desires and fantasies. Make sure you involve the whole family, because everybody should contribute to implementing the plan.

SELF-CONTROL

Once the actions have been decided, it’s time to face the biggest challenge: exercising self-control. To fulfill your financial goals you must control your emotions.

Human beings are a mixture of reason (rationality) and passion (impulsiveness): two essential elements present in all of us to a greater or lesser degree. Rationality affords us the capacity to manage our finances in order to fulfill what we have planned, while impulsiveness opens the way for improvisation and experimentation. As always, it is crucial to find the right balance. However, it is important to bear in mind that in the culture we live in – where a constant bombardment of advertising drives immediatism, consumerism and hedonism – finding this balance requires us to lean more towards rationality and management.

Immediatism and consumerism are the household budget’s biggest enemies. By satisfying fleeting whims, they make us stray from our plans and turn us into spendthrifts.

When it comes to money, all things come to he who waits. For example, if you save just R$2 a day from birth, by the time you are 30 you will have saved R$58,700 (based on a monthly interest rate of 0.5%). Those who don’t have the patience to wait end up having to borrow money or using the credit card. Based on an annual interest rate of 10%, it would take 30 years to pay off a loan of R$58,700, making monthly repayments of R$496.54!

Be careful when buying in installments, going over your credit card limit, or using your overdraft! Remember, it’s not your money, it’s on loan! Services where you “rent” money come with a price, which you pay to a bank or financial institution that has received money from investors and savers who have trusted their savings to these organizations in exchange for income. The interest is the “rent” we either pay for using other people’s money or receive when someone uses ours.

Credit is not “prohibited”. When used responsibly it can help us to realize our plans, such as buying a home or paying for university (below are just some of the things you should take into consideration before taking out a loan). Buying a home or investing in your education are assets for life and so warrant taking out a loan. But taking out a loan requires lengthy deliberation about whether you really need the money at that exact moment. Ideally, you should try to use time in your favor and patiently let your money grow and build your assets.

When we are unable to exercise self-control and let ourselves get carried away instead of following our plans, our money doesn’t go as far – and we run the risk of getting into debt and the worry that goes with it. Knowing how to wait is a very special type of action, driven by perseverance and prudence. Those who are able to overcome anxiety are not in hurry because they trust they have taken the right decision.

 

You should ask yourself the following questions before taking out a loan:
– Do I really need a loan to make this purchase? Wouldn’t it be better to save up and buy in the future when I could probably get a discount for paying in full upfront?
– Will the monthly payments eat up a large chunk of my budget? Will I be able to afford them?
– How long is the repayment period? Will I be able to afford the repayments over the whole period?
– Who (or what) is making the purchase decision: vanity, desire, societal pressure, or my real need?

 

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