Planejar maintains partnerships with some media vehicles for publishing content, with the objective of disseminating financial education and the financial planning activity, by means of responses to questions from readers, performed by volunteer spokespeople, covering issues related to personal and family financial planning.
The partnership with Época Negócios, an important economy and business magazine, occurs on the online column Seu Planejamento Financeiro (Your Financial Planning, in a free translation from Portuguese), published on Tuesdays at https://epocanegocios.globo.com/colunas/Seu-Planejamento-Financeiro/plantao.html. In spite of the vehicles having different audiences, the focus is on the individual consumer.
“Should I use the money I have invested to cover my expenditures during the pandemic or is it better to take out a loan?”
The reduction or loss of income during the pandemic must be treated carefully in your financial planning. Emergency funds should be used in moments like this. But before accessing them, review all your expenditures and income. This way you will have a detailed picture of your financial life to reduce costs and bring more efficiency into your life.
You can do this upon assembling a cash flow, which is entering the net income (without taxes) and expenditures on an electronic spreadsheet, application, or ledger. Upon noting the expenditures, try to categorize them within each of the groups: housing, food, communication, health, education, transport, leisure, and personal expenses.
Analyze and choose which of these expenditures can be renegotiated or exchanged for another of lesser value during the pandemic. It is the case with Internet, telephone, and cable TV subscriptions, which can be exchanged by means of portability. Assess the possibility of reducing electricity bills by switching to the white rate. Investigate whether there is waste in food costs and eliminate it. Renegotiate rent and debts.
If you have mortgage payments, assess the possibility of putting them on hold, which may give you breathing room at first. But caution: first check the conditions of the bank to know how much you will pay in interest due to this pause.
It is also the time to look into what you do not use and to sell it, converting forgotten objects into money. Build a forecast of future income and expenditures and so you will have a budget.
After that, it is likely that the amount you considered borrowing or redeeming from your investment will decrease. And this can be considered a gain, either because your investments will last longer, or because your future will be less compromised.
But let’s get back to your question: using the money you have invested or taking out a loan?
If this money is invested in the emergency fund, in a fixed income investment and easily redeemed, check which is the expense coverage index. Divide the total invested by the value of your new monthly expense. The result will show how many months you can live with your funds. In this case, it is better to use the money that you already have than using credit.
You may have asked this question because you invested thinking in performing some medium or long-term project, such as retirement.
If this is the case or you have invested in investments that demand longer terms to deliver returns, find out whether the profitability is greater than the loan’s interest.
This would be a more mathematical criterion to help you make this decision. It is important to remember that, in most cases, the loan’s interest will tend to be much higher than the return on the invested money. By this logic, it may be more advantageous to redeem your investment.
According to the Central Bank, in May, the interest rate for personal credit was 5.1% per year. This rate is an average of what is charged by Brazilian financial institutions, set in accordance with the credit profile of each client (called score) by the banks. If you have access to (payroll) consigned credit, the average rate ranges from 1.4% to 2.2% per year.
Upon using credit lines, you will compromise your future budget. Then simulate the installments on the spreadsheet and assess if there is the risk of not being able to make the installments in the future, in case your income does not increase.
If your investment is on Pension Funds, be even more careful, since they are your funds for the future. In addition to analyzing the profitability, simulate the redemption to know how much you will pay in taxes.
There are many details that you must observe, but the priority is to avoid indebtedness and assess all alternatives. If you do not want to use your investments, invest on the initial tips, assembling a cash flow and budget. Upon dedicating yourself to this, you may require less of your funds than you previously imagined when you submitted this question.
Rejane Tamoto, CFP®️