Market economies have varying prices for goods and services every year. This has a significant impact on life and our consumption habits. Inflation is when prices increase consistently and in general. Also, each euro means that we purchase fewer products.
Inflation slowly reduces the value and standard of living for middle-income families. Price changes have a greater impact on some products than others. We place more emphasis on the price of products that make up a significant portion of our expenses when calculating the average rise. These include mortgages, energy, and food.
Three financial collapses have occurred in the past 30 years:
-The burst of the Japanese real estate and financial bubble, which caused property prices in Japan to plummet sharply (1989-1990).
-In 2000-2001 when the dotcom boom burst. This refers to the end the period of economic growth experienced by the first technology companies in the new century.
-2008, after the collapse of the subprime bubble and global collapse in the real estate sector.
Recessions can be a learning opportunity for those who are looking for enrichment.
Assets are financial resources that have a tangible value and generate benefits over time. Assets could be stocks, bonds, mutual funds or stocks. They can also include real estate income and intellectual property.
Liability, on the other hand is an expense that doesn't generate money. These are the material goods and daily expenses that contribute to social survival, such as cars, houses, and clothes.
High-income people borrow money from banks to invest in assets. Middle-income people, on the other hand, ask for money to purchase liabilities and then take out debt.
The wealthy buy assets while the poor have only expenses. The middle class purchases liabilities believing they are assets. Families must improve their financial planning by enhancing their financial intelligence. The majority of people don't have basic financial education. This is an essential subject that should be taught in the European educational system.
The following cash flow and payment priorities will be followed by this family: 1, 2, 3 and, if applicable, 4. A financial plan that is optimal should follow the following payment orders: 1, 4, 2, 3, and 4. Priority should be given to assets (assets), and not liabilities (liabilities).
To increase purchasing power, there are many ways to feed your asset column. Let's say we own a mortgaged apartment that we rent out. After taxes, mortgage and property costs are paid, you can expect an investment return of no more than 3% per year. This might sound like a good investment but it wouldn't be as interesting if another asset, such as stocks, offered a higher return per year with the same investment.
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.
It is important to understand that investing can be risky if you don't have the right knowledge. You need to have the ability to invest and be able to understand accounting, markets, supply, demand, and law. Financial education is therefore essential.
The conditions for accessing real estate credit today are more restrictive than they were before the 2008 financial crisis. Due to this, a middle-class family with an unfixed contract is the best choice for a mortgage client.
Recent changes in the way borrowers consume interest rates have led to a shift. Fixed interest rates are preferred by clients. Although it may seem more expensive, you can avoid major risks over the entire loan's life.
The INE reports that 72.7% of people who apply for a mortgage to finance a home opt for a fixed rate while 27.3% prefer a variable interest rate. This leads to an increase in long-term borrowing.
Due to lower interest rates, middle-income families had more debt in 2021. According to the INE for the first quarter 2021, 96 609 mortgages were signed.
However, record numbers were reached during the quarter 2022 when a total number of 116.100 mortgages was registered. Despite rising interest rates and terms, the number of mortgages has increased by 16.8%.
This situation confirms the importance of financial education to help families learn how to manage their debt, maximize their income, and improve their quality of life.
This article was published in "The Conversation".