Author: Nuria Rojas, researcher at FAIR Center of Business School of Tecnológico de Monterrey.
I recently saw the following question from a mother on a school recommendation portal: “I have a dilemma, I am between school A and school B, both are good, but A is superior in several aspects, it costs twice as much. tuition (which I can afford) but at the same time I can't afford the lifestyle so easily. What is better? “Something that fits my lifestyle or sacrificing everything for my children's education.”
This could be a question for you with a simple answer; However, for many people the answer is not so obvious. Or maybe you've been in a similar situation where you don't know what to do. That is why I want to talk about financial vulnerability and how to avoid it, so that the next time you have to make a decision you can do so taking into account your well-being and that of your family in the long term.
Financial vulnerability is the risk or probability that a person will experience financial difficulty that causes a decrease in their current standard of living; which means that not only people in poverty or low income are vulnerable. People at middle income levels could have high levels of vulnerability triggered by high levels of debt.
Leading a standard of living higher than our income possibilities harms us because we begin to compromise our income to only pay debts; With this we do not leave room for savings and investment. Imagine that you buy a house with a great sacrifice in a sector in which you will also have to buy a car that is in accordance with that level, your children have to go to a certain school, the vacations that your neighbors take are of a certain frequency or to places specific. Having made that effort for the house caused your other expenses to increase like a snowball and you could eventually risk your assets.
Since the 18th century, the French philosopher Denis Diderot spoke about this effect. One day Diderot received a gift; a scarlet robe that fascinated him. However, the elegant robe did not match his other belongings as they were not up to par with his new robe. Diderot began to spend on furniture for his home that matched the gift, starting with a new armchair, later a table, until completely redecorating.
Finally, Diderot wrote an essay titled “Lament for My Old Robe” in which he regrets the possession of his robe; since without it I would have no debts.
According to the Statista portal, in 2022 only 22% of Mexicans were debt-free and 44% of Mexicans reported that their savings decreased. During the same year, 7.2% of the Mexican population was considered financially vulnerable due to low or lack of income, corresponding to 9.3 million Mexicans. What does all this say? A large part of Mexicans can be found in a level of financial vulnerability that prevents them from making ends meet by covering their basic expenses such as food, services, rent or mortgage, loans; deal with unexpected payments or medical emergencies.
Have you thought about how long you could cope with your lifestyle if your household stopped receiving your income? Some experts suggest having a savings of between 3 and 6 months of salary or an amount that can cover our most important expenses. This will help you reduce your level of financial vulnerability by giving you the time necessary to look for a new source of income. Other recommendations are not to depend on a single source of income and keep your debts at a controlled level that does not take up a large proportion of your income.
Finally, I invite you to question your acquisitions or payment commitments that could trigger a Diderot effect in your life, it is good to have dreams but they must always be grounded and objectively plan the way to carry them out without harming our financial well-being and the tranquility of your life. family.