At times of rising prices, prudent financial management should be top of mind.
Rising prices have been a major topic of discussion over the past few weeks. In essence, however, little can be done by individuals to mitigate the effects of rising fuel and commodity prices on a global scale. Nevertheless, it constitutes a good opportunity to recall some simple and basic rules that should be applied by all households, be it in times of high inflation or in times when prices are at lower levels.
Τhe (often forgotten) general rule that everyone should follow, is that we must not spend more than we earn. Whether this is being implemented by the majority of households will be seen in practice in a few years, although we are concerned that low interest rates and government subsidies may have pushed many to take on loan obligations, which they may at some point, be unable to meet. The current situation is a great example: the cost of living is increasing and with it, the financial pressure on an average household.
That is why this article aims to be just a… kind reminder of the 28/36 rule. A very simple rule that helps us calculate the impact that lending can have on your household’s financial situation. In particular, the number 28 refers to that you should not spend more than 28% of your gross income on housing-related expenses. These expenses may include a mortgage, home insurance and property tax. For those who rent a property, it concerns all the expenses related to the property in which they live in. The number 36 refers to that you should not spend more than 36% of your gross household income on borrowing-related expenses. That is, expenses that in addition to a housing loan may include a car loan, or credit cards or even the purchase of some goods and products in monthly instalments—an increasing consumer trend, lately. For example, if the annual gross family income is €40,000 then your housing costs should not exceed €11,200 or €933.30 per month. Accordingly, your annual borrowing-related liabilities should not exceed €14,400.
We do not need to delve into the reasons why all households should exercise prudent financial management. During the last few years, we have all been witnesses to the situation with non-performing loans, the accompanying loan sales and the high private debt which is currently impeding economic growth.
Be that as it may, we are all witnessing increases in fuel and basic consumer goods. If, for example, the fixed expenses of a household have increased by 10% -15% during this period, then those who did not comply with ule of 28/36 will face problems and will find it difficult to meet their financial obligations as their financials will be further stretched. Things become even more difficult for those who did not follow the 28/36 Rule at all. If price increases continue in the long run, including interest rates rising on existing loan facilities, then the situation will become even more troublesome.
That is why prudent financial management is always necessary. Even more so during the good times, since that is when the necessary “stock” for the hard times is created. And there will always be difficult economic periods, either because economic cycles are coming to an end or because unexpected events occur.