he effort rate is, in fact, a financial metric that allows each household to objectively and effectively monitor their financial situation in relation to the expenses they face. However, given the large number of households and the variability in terms of monthly income, effort rates show different percentage values and sometimes varied interpretations. You can simulate your effort rate using the Coverflex effort rate simulator.
What is the recommended effort rate?
The recommended effort rate should be between 25% and 40% (it should not exceed this value). These values indicate that the respective household can comfortably meet their financial obligations, while still having the capacity to build possible savings, cope with unexpected expenses, and experience, to varying degrees, some financial relief. This represents a numerically positive financial health situation.
In summary, the total effort rate in relation to existing loans should not, numerically, exceed two-fifths (40%) of the total net income of the household in question. Therefore, the lower this value, the more balanced and comfortable the household's financial situation will be.
In most cases, effort rate values should never exceed 50%, according to the Bank of Portugal, as such situations demonstrate that a household is allocating about half of their total net income to financial obligations, which could eventually lead to some financial complications. In fact, according to the guidelines of the Bank of Portugal, it is recommended that Portuguese banks do not grant loans that result in an effort rate above 50%.
Case-by-case interpretation
Although there are recommended effort rate values, interestingly, the interpretations of equal percentage values can vary widely depending on each specific household.
For example, let's consider a situation where two households have an effort rate of 32%. However, the first household has a total net income of 2,500 euros, while the second household has an income of 6,000 euros. In this situation, although the effort rate between the two households is the same, the remaining money (after fulfilling their respective financial obligations) will be different and, in the second case, will allow the household to enjoy a healthier/more comfortable financial situation than the first.
Therefore, it is important to highlight that although there are reference effort rate values, each household should evaluate their rate individually to thoroughly understand their financial situation and set concrete goals.
Savings tips
If you find yourself in a situation where your effort rate is higher than desirable, here are some tips that may help you reduce this indicator:
- If you have multiple active loans, you can approach your credit institution and consolidate all the instalments, thus achieving better payment conditions (evident through a reduction in the total instalment) with an extended term and possibly a more desirable interest rate.
- You can also try to renegotiate the value of your loan with your credit institution, seeking to extend the payment term or reduce the spread—since most banks are applying spreads in new contracts between 0.95% and 1%—or even try to transfer the existing loan to an institution that offers better conditions.
- Like the financial obligations derived from existing loans, monthly household expenses also have a significant financial impact on the household. Therefore, it is advisable, to a certain extent, to review existing contracts, negotiate with the respective providers, or even change providers. This way, you can reduce some of your household expenses, which will allow you to improve your current financial situation.
In conclusion, the effort rate is a relevant indicator and demonstrative of each household's financial situation. However, this metric should be evaluated separately and individually (for each household). If the respective value is not desirable, there are ways to alleviate and possibly reverse your financial situation.
