November 30, 2022

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By: Diana Bello Aristizábal
 
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October is Financial Planning Month and, therefore, the opportunity to review personal finances for the upcoming end-of-the-year season, which involves a significant increase in expenses, in order to prevent families’ economy from getting harmed by not making a projection into the future.
 
This is a task that requires discipline, knowledge, and strategy in which factors such as income, expenses, the ability to save, and to create new sources of money come into play.
 
In addition, it is also imperative to take into account the nation’s economic situation since making a financial decision at the wrong time can bring more scarcity than abundance. In order to help you finish the year in good financial health, here are some recommendations that you should start putting into practice now and not leave them for the very last minute.
 
Budget and savings
To start, it must be clarified that regardless of the month of the year in which financial planning begins, the elements to be valued will always be the same. The first one is to have clarity about income. “The golden rule is that expenses should not exceed income,” Carolina Acero, an expert in financial planning, states.
 
This is easier to check during this month of the year because there is already a history of nine months in which it is known how much money has been earned up to that moment and how much has been spent. In this sense, only the remaining three months of the year are left to be projected.
 
“The budget must be analyzed on an annual basis first and then monthly, taking into account that some months of the year involve higher spending, such as December. However, if we know how much we had budgeted to spend in the 12 months of the year (for example, $90.000) and we have already spent $70.000, we only have to work on the $20 thousand that we have left,” Carolina explains.
 
But what happens when a family has no knowledge about the above? In these cases, a budget must be made from scratch for these three months with three elements in mind: expenses, income, and savings.
 
Due to the fact there’s a big difference between creating a budget and actually doing it, Nelson Sotomayor, an economics professor at Miami-Dade College, suggests using mobile apps to create one and track spending, such as Rocket Money, Mint, or YNAB.
 
“Many of these apps are free, they can be connected to the bank account, give users information about how much they are spending and send notifications when they are already approaching the ceiling of their budget. These apps are very appropriate for those who find it difficult to monitor their expenses,” the professor says.
 
If,  when evaluating the income over the expenses, there is not enough room for savings, the recommendation is to re-analyze the expenses in order to determine which of them can be cut off.
 
For example, if your original budget allows $300 for family outings but no money left over for vacations and Christmas gifts, you might decide to go out once or twice a month instead of four.
 
In this regard, having flexibility, adaptability, and clarity about what is truly important for each family can be very helpful. If, for example, it’s Christmas presents then swap a plan at a restaurant, which can cost between $60 to $200, for a movie night at home.
 
Another leak of money that can make it difficult to save has to do with the brands and items that we choose in food, clothing, or similar. For this reason, Nelson Sotomayor suggests preferring cheap brands and eliminating or replacing fruits, vegetables, and basic products that are on the rise.
 
In addition, save on items such as gas. “Carpooling with colleagues from the office or school who live in the same area or using the train or bicycle if you are in an area like Downtown Miami can be very useful,” Sotomayor says.
 
Mobile apps, streaming services, cable television, or cell phone plans can also decrease the ability of families to save. Therefore, it is convenient to monitor the different companies that sometimes offer promotional or more economic plans.
 
“The goal is always to save at least 20 percent of income because that money can rescue a family that may have budgeted poorly or had an unexpected expense. In such a case, savings can be used to pay off a debt or an important expense,” Carolina explains.
 
Keep in mind that once financial planning becomes a long-term habit, other elements such as investments can be integrated to produce higher returns.
 
But to know what to invest in, it’s key to identify whether the money will be required in the short or long term. “In my house, we invest in the stock market with the purpose of saving for our daughters’ education because it has been shown that in 15 or 20 years, you always win,” Carolina Acero argues.
 
However, if the money is needed in the short term, i.e., 3-5 years, her suggestion is to put savings in a certificate of deposit or treasury bills. “I do not advise putting all savings in these, a part should be left in a checking account so that the money can be used immediately in case of an emergency.”
 
Be careful with credit cards
Planning the household economy for the holiday season or to generate a long-term healthy intake and savings habit involves not only preparing a budget but also knowing how the economy is doing.
 
According to Nelson Sotomayor, inflation will remain high in the coming months. “Now it’s at 8.3%, and it may be placed at 8 or 7.5 percent. Due to this scenario and the fact that unemployment remains low, the Federal Reserve will definitely continue to increase interest rates, so this is not a good time to buy a house, acquire large debts or fill up credit cards.”
 
As for credit cards, although it may be tempting to use them for Christmas purchases or end-of-the-year trips, try to take them out as little as possible because they fluctuate according to interest rates.
 
“The increases in interest rates have been very rigid and strong. Under normal circumstances, the Federal Reserve makes increases of 25 basis points or 0.25 percent. However, lately, they have been of 0.75 percent and this upward trend will continue until the end of the year,” he says.
 
Instead, Sotomayor says it’s better to use the ‘buy now, pay later’ system offered by some companies. Under this model, consumers can pay for their products and services in installments without interests being charged.
 
“It is a good option for someone who is on a tight budget or who wants to spread their payments, but it should not be abused because companies charge a fee for late payments and it is easy for debt to accumulate.”
 
In this regard, Carolina Acero believes that people buy with credit cards excessively because they are used to living from day to day. “We must not forget that it’s a debt acquired when spending is greater than the money coming in.”
 
This means that far from eliminating them completely, maneuver them wisely. Doing so implies paying off debt in the same month in which the purchase is made in order to improve credit history and receive the benefits they grant.
 
And what do we do with Christmas shopping? Experts say that it’s best to start early, either in October or November. “Start buying little by little between now and December because the closer we are to Christmas, the more expensive things will get,” says Sotomayor.
 
Gifts should be included in the budget by setting a maximum amount of money based on previous years’ history. “If there is no history, make a list of the gifts to give and the money that will be invested in each one. In this category, we must also include gifts to teachers and school end-of-the-year contributions,” Carolina states.
 
In this way, financial planning is, without a doubt, the best way to mitigate the economic impact of the end of the year and the first step to having good financial health throughout the year.
 
 
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