Many people think that the most indebted people are the ones with the least, but this is not the case. It is a problem that occurs at all social levels and has different faces. However, in many countries around the world, the most affected sector is the middle class.
There are many causes and we have already talked about them. Many times people are not clear about their priorities or confuse them. Others think that living on credit is “normal”, everyone does it and it is the only way to achieve things. Most are unaware of the effect credits have on their personal finances and their cost, both financial and opportunity (impact on their future cash flow).
Along the way I met people of all kinds. Once I had to help a couple who simply did not know how to say no to their children. They had them in a prestigious school but surrounded by people with greater economic capacity and where to belong you had to have similar things. They had smartphones, video games, branded tennis, vacations at certain resorts, private lessons, therapies, etc.
This couple had very high incomes (both high-level executives) but were not entrepreneurs. His short-term debts (credit cards, car loans and personal loans) totaled more than a million and a half pesos. In addition to the mortgage on the house.
The minimum payment of all their credits took them more than 70% of the family’s net income and they already felt the rope around their neck, although they could still cover it.
I remember when I made them the calculation of their assets. The balance in their bank accounts was close to zero (whatever was coming in as income was going quickly). There were no investments, voluntary retirement savings, nothing. His equity was positive, but very small considering the value of the house and its respective mortgage. His current assets (excluding home and mortgage) were negative. Although from the outside it seemed that they had it all.
They had already tried to approach a financial institution to seek a restructuring. They wanted to continue paying, but they tried to refinance their loans for a longer term, to have a slightly more comfortable handling. They were denied, because very few banks offer such programs. The manager himself told them that if they stopped paying, maybe the bank would offer them some scheme. Is incredible. Failure to pay should never be an option.
We did an analysis together and I made them a plan to get out of debt that would allow them to get out of all their credits (except the mortgage) in just over three years. But to do so, they would have to ditch luxuries, specifically family vacations and expensive Christmas gifts. In addition to suspending the use of credit cards.
I also taught them to make a spending plan, taking into account irregular expenses, which we had to reduce significantly. Most of them were quality of life (trips, gifts, as we mentioned) but they were not essential. And I recommended that they talk to their children about that situation, who had no idea of the financial truth at home.
This is all an iterative process, to be sure. It is a learning path. Taking control of our money is not something that can be achieved overnight. At first you fail, but you learn to change your plan (that’s why it’s so important that it be flexible and that we can adapt it on the fly, to correct the path).
Personal Finance Coach
Heritage
Senior executive in insurance and reinsurance with strategic business vision, high leadership, negotiation and management skills.
He is also a Personal Finance columnist in El Economista, Personal Finance Coach and creator of the page www.planetusfinanzas.com