When people find out that I’m from Venezuela, they generally bring up one of three things: oil, beauty pageant winners, and baseball.
Venezuela is a country in South America with a population of 30 million people and a land mass roughly the size of Texas, and for the past 40 years, baseball, oil and beautiful women were in fact what put it on the map.
Recently, however, Venezuela has only been making headlines because of the absolute financial mess it has gotten itself into. Everything is going wrong, from experiencing a shortage of toilet paper, to the constant currency devaluation, to talks of default, to (gasp!) RUNNING OUT OF BEER!
In fact, a recent Bloomberg Business survey listed Venezuela as the most miserable place to live and work in the world.
The failing Venezuelan economy has taught us a lot about what NOT to do. In fact, I though Venezuela’s financial mishaps can provide us all with 5 easy to understand personal finance takeaways to live by:
1. Save more during the good years.
From January 2002 to June 2014, the price of oil went from $25 to $105 per barrel. As one of the world’s top oil producers, this resulted in a financial windfall for the relatively small nation.
Instead of boosting its cash reserves, Venezuela gave away free oil to its neighbors for political influence, spent heavily on social projects that had minimal benefits, and squandered away the oil boom money because of rampant corruption and incompetence.
Your annual income can fluctuate from year to year, oftentimes due to factors outside your control, such as a bad economy, down stock market, smaller bonus, or unexpected layoff.
To be better prepared, save a little bit more during the good years. It’s tempting to get carried away when you’re making a bit more money and splurge on non-essential expenses.
Instead, stick to the prior year’s budget and put the additional earnings into paying down debt, maximizing your 401k, or starting a college education fund for your kids.
2. Don’t put all of your eggs in one basket.
Venezuela suffers from the “resource curse,” an ironic situation in which countries with an abundance of non-renewable resources experience stagnant growth or economic contraction. In Venezuela’s case, the money making resource is oil, accounting for 95% of its export revenue.
Over the years, Venezuela has neglected its manufacturing, agricultural, tourism, chemicals, and other industries that were once very promising, making it a one-trick pony and leaving its economy extremely vulnerable to downturns in the oil market.
Don’t get me wrong, you should focus most of your time and energy on what you do well, and what makes you the most money.
That being said, being too exposed to one revenue source, one stock, or one type of investment can leave you vulnerable to unexpected downturns. Diversify your earning streams.
3. Seek out expert advice.
If you study a list of high ranking Venezuelan government officials, you will notice that a lot of them are family members or ex-military officers, with personal ties to the late President Hugo Chavez.
The administration essentially replaced industry experts and senior government officials with “yes men” and cronies with little-to-no experience in the job they inherited. This has resulted in widespread mismanagement of major government programs and a deteriorating economy.
Not everyone has the time to learn the ins and outs of budgeting and money management, though most financial decisions can be complicated and have long-lasting impacts.
Before making your next big money decision, reach out to an expert, experienced family member, or a friend you trust. It may cost a bit at the outset, but it will likely save you in the long run.
4. Your credit score and reputation matter!
The government’s total mishandling of the economy has led to a rating of “junk” on the debt markets, making it nearly impossible for them to borrow money from traditional sources, and hampering their ability to get out of this mess.
Not only that, but the government’s hostility towards free enterprise and propensity to nationalize companies, the second worst homicide rate in the world, and the widespread corruption in day-to-day life makes Venezuela extremely unattractive to foreign investors.
Having a bad credit score can impair your ability to get a personal loan or credit card, apply for a mortgage, or even get a job.
In addition to performing credit and background checks, employers and creditors are increasingly running Google searches and looking into social media activity when considering applicants.
In today’s Internet age, everything is saved and available for future scrutiny, so maintaining a positive and trustworthy image is very important to your earning potential. When posting on social media, ask yourself this: Would I want my grandma, a room full of 1st graders, or my boss to see this?
5. Careful who you borrow money from.
Since 2007, Venezuela has borrowed over $50 billion from China, plus billions more from Russia in the form of bonds. While both of these countries are okay trade partners, the majority of the loans have unfavorable terms for Venezuela, in the form of providing free oil in return for the debt.
Given that Venezuela relies on oil for 95% of its export revenue, giving away so much free oil in the form of debt payments makes it near impossible to earn their way out of their debt mess.
Though taking on debt can provide certain benefits, it should be reserved for very limited circumstances.
If you have to borrow money, make sure you only deal with reputable lenders and avoid predatory loans at all costs. Getting stuck with unfavorable terms will cost you dearly in the long-term, significantly limiting your ability to save or improve your financial wellbeing.
Learning and applying these rules will go a long way in keeping your bank account from ending up like Venezuela's, and more importantly, it will keep you from running out toilet paper and beer!