Lack of financial education is a problem that manifests itself daily in the well-being of families. It is the direct cause of the lower amount of families' financial assets (or household wealth).
Ideally, such wealth, whether in the form of pension funds, insurance and equity securities, or as real estate and other durable goods (such as cars) from households, should increase as the family generates income and consolidates its financial situation.
Unfortunately, the opposite is happening.
According to figures released by the Central Bank of Chile, Chilean household debt has increased 140% in the last six years. An average household needed five monthly incomes to pay its debts. Today, it requires more than seven.
(El Mercurio, August 1, 2011)
This means that, in the last six years, the debt of Chilean families more than doubled.
Why?
Although there are many factors that affect the financial situation of families, one of the main reasons for debt is the lack of financial education.
Nowadays there is an excess of offers of credit cards, consumer credits, installment payment system, etc. It is too tempting for anyone to go into debt to acquire a good immediately.
The problem is when this becomes a habit. Without realizing it, these people get more and more indebted and suddenly find themselves before a mountain of accounts that they can no longer pay.
If you are burdened with a level of debt that seems to increase more than it decreases, it is important that you implement drastic changes to improve your financial situation.
Five safe steps to get out of debt:
1. Education:
You are where you are because you have lacked the information necessary to manage your money in another way. Many people have an excellent education in other areas and receive a good salary, but have not received the financial education to manage and multiply the money that gets their hands.
The good thing is that this shortcoming is easy to solve. There are many resources available to educate yourself on personal finance. It is a matter of getting informed, educated and acting.
2. Planning
With a good financial education you will be able to see your personal finances with different eyes. You will have understood that it is feasible to reverse your situation to such an extent that you are the one who receives interest payment for well-made investments, and not the one who pays interest on poorly managed consumer debts.
With that encouraging vision in mind, you can start planning your budget and changing your spending habits. The first thing you are going to have to do is restrict yourself.
3. Restrict expenses
The only way to create wealth in the long term is to live below the income level.
To get to that point, a meeting must be held between all the members of the family so that together they can prepare a restriction plan that allows a surplus of money at the end of the month.
It is not easy to tighten the belts. At this stage it is important to remember the benefits of being debt free and of building for a more solid and lasting future economic well-being.
4. Eliminate credit cards
With the surplus you have left at the end of the month, start paying each of your cards, starting with the one with the highest interest rate.
Once you have a card paid, add the minimum fee you paid for that debt to the surplus left over from your income and pay the second card. This will give you a "snowball" effect by which you can pay off your remaining debts.
5. Save and invest
Once you are free from your debts, don't increase your expenses again. Continue to educate yourself in the financial area and learn how to invest in investment vehicles that give you higher interest rates than a simple savings account.
By diligently following these 5 steps, you will not only be debt free, you will also be in a position to build a strong financial position for the future.
