023 can be a challenging year for many Portuguese people, especially for those with a mortgage. Although many workers and pensioners will benefit from an increase in their net income this year, it is expected that high inflation and rising interest rates will continue to affect personal finances and reduce families' purchasing power.
Thus, this is a year that requires greater cost containment and strategic planning to obtain a monthly break in the family budget. If you anticipate the effects of rising interest rates and inflation, you have the possibility of achieving some financial stability.
But in order to achieve good results, you need to review expenses and contractual conditions, and even - who knows - make cuts and change your contracts to other entities. In this article, we give you some tips on how you can prepare for 2023.
Inflation rate may drop in 2023, but the future remains uncertain
According to the latest data compiled by the National Institute of Statistics (INE), inflation decreased by 0.3% in December, settling at 9.6%.
The year-on-year rate of change in the index for energy products also dropped to 20.9% in December (in November it stood at 24.7%) and the index for unprocessed food products fell from 18.4% ( November) to 17.6% in December.
Although the data may seem encouraging, it is impossible to anticipate that the inflation rate will continue to decline progressively. However, according to Eurosystem specialists, in 2023 inflation in the Euro Zone is expected to drop to 6.3% and, in 2024, to 3.4%.
As long as the decline is not reflected in the portfolio of the Portuguese people, the management of the family budget will have to be meticulous. After all, considering the prices of most products and services are higher, you should create a new budget for this year, focused on what is essential for you and your family.
Interest rates will continue to rise: get ready for increased credit instalments
As probably everyone is aware by now, since the beginning of the second half of 2022, the European Central Bank (ECB) has been making successive increases in reference interest rates in the Euro Zone, with the aim of curbing the accelerated growth of prices.
ECB has already announced that interest rates will continue to rise in 2023. This means an increase in financing costs, both for households and companies. And, if you are the holder of a mortgage with a variable rate, you should prepare yourself, as your monthly credit instalment will increase in 2023.
Taking into account the measures approved by the Portuguese Government for the renegotiation of housing loans, if you have an effort rate greater than 36%, you will be able to review your contractual conditions. If, at the moment, your credit instalment is too high for your budget, know that banks must find solutions that reduce the risk of default.
Thus, the bank can present proposals to you that lower your interest rate for a certain period of time, increase the maturity of your contract or review other conditions that reduce the impact of the Euribor rise.
If you are not aware of how your instalment increases, know that this is reviewed according to the Euribor rate term that is in your contract. However, the amount used to update the monthly fee refers to the average Euribor rate for the two months before the new instalment came into force.
This means that, if your instalment is updated in January 2023, the average Euribor for November 2022 applies, within the period established in the contract, which, as a rule, will be 3, 6 or 12 months.
Having said that, it is essential that you are aware of the monthly average of the Euribor, in order to be able to simulate future increases in your mortgage payment. To do so, you can use the Euribor variation simulator for home loans.
If your instalment puts your budget at risk, you should renegotiate your contractual conditions as soon as possible. You can, for example, try to lower your spread and/or the amount regarding associated products, such as life insurance on home loans and multi-risk insurance.
In addition, this is also a good time to see if you can get better conditions with other entities. Ask for simulations and, if you find a more advantageous proposal, with no associated costs, you can transfer your mortgage loan to another financial institution.
Net income increases in 2023 for several workers
If you are an employee, there is a possibility that your net income will increase throughout 2023. If you earn the minimum wage, this year your salary will rise from 705 euros to 760 euros.
In practice, taking into account that you are exempt from withholding tax (according to the 2023 personal income tax withholding tables), your net salary will be 676.40 euros. This is because you will have to deduct 11% of your salary for Social Security (83.60 euros).
If you are a public agent and have a salary of up to 2,600 euros, you will have an increase of around 52 euros. Above that amount, the salary update will be 2%.
These increases are added to the increase in the amount of the meal allowance approved in October 2022. This allowance is now 5.20 euros per day when paid in cash (in 2022, the amount was 4.77 euros per day). If you receive the meal allowance in a voucher or meal card, the amount is now 8.32 euros per day (in 2022 it was 7.63 euros).
Employees of private companies may or may not benefit from these increases. Taking into account that the meal allowance is not included in the Portuguese Labour Code, it's not mandatory that the private sector pays this allowance nor it is mandatory for the private sector to update its amount. However, the new amounts applied to the public sector serve as a reference for the maximum tax-free amount.
If an employee works 22 days, the tax-free meal allowance received in cash can reach 114.40 euros per month. When you receive it in a voucher or meal card, the maximum exempt amount is 183.04 euros per month.
Last but not least, many employees will see their salary increase due to:
- an increase in the minimum level of existence;
- a reduction in the marginal rate of the second personal income tax bracket, from 23% to 21%;
- an update of 5.1% of the personal income tax brackets.
These three factores are reflected in the new personal income tax withholding tables in 2023, which, in practice, represents a decrease in personal income tax withholding at various levels and, consequently, an increase in net salary.
If you have doubts about how much you will receive this year, you can use the net salary simulator for 2023.
What can you do to improve your personal finances in 2023?
Given that 2023 can be a financially challenging year, it should be strategically planned early on and adapted to certain changes.
So, to gain some financial leeway, you can start by:
- Looking at your 2022 family budget and reworking it, taking into account earnings and spendings for 2023. Enter all your updated income and detail all your expenses, even those that seem irrelevant. This way, you can identify your main expenses, and where you can make cuts.
- Analysing, if you have several credits contracted, the possibility of making a consolidated credit. Credit consolidation allows you to reduce your monthly loan charges, as it combines all installments into one, with a single rate being applied, which tends to be lower. By consolidating your credits you can save around 60%. But it all depends on the amount owed, the terms in force and the contractual conditions.
- Reviewing your insurance portfolio, among other contracts. Throughout life, it is normal to take out various types of insurance, whether these are: car insurance, life insurance, health insurance, credit insurance, among others. However, if you want to gain some financial relief, confirm that you do not have repeated coverage or coverage that you no longer need, and check if you can benefit from better conditions with other insurers. In what comes to other contracts, pay attention to changes in amounts and don't be afraid to look for more advantageous solutions for your consumption.
- Analysing, if you have a savings account at the bank, the possibility of making certain investments or amortisation of your credits. With savings stopped at the bank, you are currently, deep down, devaluing your money. This is an excellent time to think about maximising your savings in the medium/long term or using part of them to pay off your home loan or others. In terms of savings, if you have a Retirement Savings Plan, this year you have the possibility to redeem up to 1 IAS per month (480.43 euros) without any type of penalty. This means that you can redeem, until December 31st, 2023, the maximum amount of 5,765.16 euros. This amount can be an excellent help to balance your finances. If you want to reduce your credit costs, analyse the advantages of amortisation, reducing the amount of your instalment or the term of the contract, by reducing the outstanding capital and interest.
As this is a year for prudence, avoid impulse purchases as much as possible and rethink your consumption habits. Remember that the more you manage to save or reinforce your emergency fund, the more financial stability you will have to face possible obstacles in 2023.