All families face the challenge of handling their monthly expenses. Its complexity depends on the average income and the cost of livelihood for a country or region.
According to an OECD study, the average household income available varies widely across countries (2016). The average disposable income (ADI) is a concept that brings into account the income from labour and wealth. In addition to state transfers (subsidies and funding), rebate taxes, as well as social security (calculated in US dollars with the purchase parity pricing methodology - this is adjusted by the cost of living). In other words, the ADI is the income that households have available to buy services and goods.
The OECD ADI’s per household is 19,355 euros (we convert to the euro at the current exchange rate 1 USD = 0.84 EUR for easy reading). In Portugal, it is € 12,828, which is well below average, while Spain (€ 18,143), and Italy (€ 19,113) are close to average values. Above OECD’s average, we find France (€ 21,546), Germany (€ 22,400) and Belgium (€ 24,371). Two examples of European countries indicating a high tier of wealth are Switzerland (€ 30,542) and Luxembourg (€ 34,620).
“Spend what’s left after saving”
We suggest that you keep at least 10% of your disposable income. If you can’t, if you find it difficult or if you don’t see how you’re probably adopting the wrong approach. As Warren Buffet says in “The American Business Magnet“, "do not save what is left after spending, but spend what is left after saving”. Meaning, once you’ve guaranteed the month’s reservation, then you can spend what’s left.
Take the 10-month savings challenge
Speak to your family and take the test. By saving 10% of your disposable income for ten months, you will obtain an extra salary at the end of this period. Don’t hesitate. Test it. In the future, you will ascertain that the challenge pays off.
According to the latest available data (2018), after the crisis of 2008, household savings rates have been falling. In countries like Spain, the savings rate decreased from 6.6% in 2000, on average to 1.7% in 2018. In Belgium, it fell in the same period from 11.45% to 4.8%. Not to mention Portugal, with the lowest disposable income, which drops from 6.1% to a negative saving record (cannot save), especially in lower-income households.
On the other hand, France keeps roughly the same result close to the key value of 10%, from 8.7% (2000) to 8.4% (2018). Cases, where crises were less felt, have had the effect of reserves increasing. In Germany, savings have moved up from 9.3% (2000) to 11% (2018) and in Luxembourg, in the same period, from 9.3% to 16%. Take the test and practice. What is your family savings rate?
Create a spending plan
There is no point in keeping a portion of your salary for savings if then you lose control of the remaining 90%. Always have a well-defined impression of where your money goes.
Another OECD study (2019): “Under Pressure: The Squeezed Middle Class", finds that 31% of middle-class household spending (“middle-class” = households with 75% of the country’s average income up to twice the average income) is related to housing and that this percentage decreases with the increment in income.
Close to a quarter (24%) is spent on food (and non-alcoholic drinks), 12% on transports, 12% on leisure and 4% on health. The remaining 17% include several items with less weight, such as education.
As we’ve been saying, each family is a case. We know, for instance, that rents in cities such as Lisbon or Madrid can go above 50% of the household disposable income, which makes the exercise more challenging.
Rethink housing spending
Budget management often forces decisions that lead to significant changes. If you can no longer pay the rent in the city where you live, it is understandable that you find yourself in the contingency of looking for alternatives in the surroundings. If that is the case, why wait for the situation to escalate?
Housing holds significant weight in the family budget. Have you ever wondered if you need to reside in the city centre? Can’t you work remotely? Did you know that in some countries moving inland can reduce their cost of living by 40%, thereby increasing their quality of life? Don’t let monthly expenditures consume your peace of mind. Plan these expenses and adjust your way of life if you have to.
If you live in Belgium, Brazil, Italy, Portugal or Spain, you can pursue the standard recommendations from Euroconsumers Invest in where to buy better and cheaper. You’ll also find the written reports to hundreds of products of daily use. Every year, these surveys point to an annual saving of up to a thousand euros, when buying goods for the house.
Avoid loans
Avoid loans, particularly those for shopping, the rates are very high. If you need a computer for your children’s studies or buy a new car, you need to draw up a good plan to buy that commodity. Know that the lack of planning can cost you 30% more of the asset’s value due to the interest rate charged per year for this type of credit.
For home buying, mortgage credit is the norm for most families. Here are two main recommendations, regardless of the country you are living, since each nation has its conventions:
First, ponder your situation towards work, is it a stable position? Are you sure you’re going to stay long in the city (case of professions with high mobility)? Here you must take into account what is most likely and the cost of the rent.
Second, be ready to pay all costs related to the credit process (which may be more than 10% of the value of the house) also, be prepared to make a down payment.
To facilitate your analysis, we commend that you consider buying your first home as an investment. Choose well the location, check if the area is to value, if it is a neighbourhood of expansion in the city also, check if the constructor is stabilized and has always had a considerable demand for construction projects.
The more you earn, the more you spend
The higher your disposable income greater will be your saving capacity. Does it sound obvious? It does, but reality proves that there is a natural propensity to increase spending’s as pay raises. Sometimes, a higher yield can be an illusory sense of wellbeing.
Families want to live in a better house; they desire to consume other kinds of goods (increased consumption of luxury goods). They probably seize more holidays and increase visits to restaurants.
The problem is when the income drops. There’s a tendency to keep the living standards, and this is one of the primary causes that lead families to over-indebtedness.
Our recommendation is to build a “crisis” plan when you are in a very comfortable position. A sentence often repeated in the sphere of personal finance says “rich people stay rich by living like they are broke. Broke people stay broke by living like they are rich”.
Be ready for the unexpected
Make “stress” tests to your disposable income. What does it entail? How long can you manage unexpected expenses? The Covid-19 pandemic has shown that uncertainty is a constant in our lives. A more demanding bill? A car failure? An urgent repair in the house? Or a twosome break-off? In many countries, one of the most challenging factors that lead to over-indebtedness is marital divorces. It’s usual to say - and only in terms of financial conditions - “a good marriage is the one ready for divorce”.
Get help whenever you need it
Do not vacillate to ask for help, to talk with a relative or even a friend used to economize. Consult an expert’s opinion. An external vision will enable you to address aspects that you may never have discussed with the family. And sometimes, not just monthly spending, but how you structure financial availability.
Don’t leave decisions till the last minute
Don’t wait till the last minute to plan the cost of events you know will happen and will shift the structure of your spending’s. Happenings like the birth of a child, the time when your firstborn leaves home to study abroad, or retirement, can be foreseen as early as possible.
Retirement leads to an average drop of 53% in income in all OECD nations. A poorly planned transition can cause much prejudice. Know that the impoverishment of the oldest age group of the population is one of the concerns of today’s societies. We will approach this topic in the Health chapter.
As Pedro Moreira mentions in the introductory text of this series of articles: the secret is not in making money but in how to spend the money. Whether you are an entrepreneur, an investor, or just a worker, saving is one of the pivotal secrets of financial autonomy. Paraphrasing the comedian and entertainer Will Rogers: “The quickest way to double your money is to fold it in half and put it in your back pocket”.
Don’t hesitate to share your resource-raising strategy with your co-workers. Recommend Euroconsumers Invest in your company’s HR Department. Ask them to contact us and learn more about our counselling services. Contact us!
Read level 3 of the Money Framework by Euroconsumers Invest: 3. Savings: Be The Boss Of Your Money.