If there is one thing we have noticed during our time as adviser’s in the region, it’s that people tend to be spending a lot more than they think they are in certain areas; we’ve even met people who didn’t actually know how much they got paid every month.
Budgeting is critical and understanding where and why you’re overspending is easier than you think. When we meet clients, we ask them how much they spend on every day things such as food, rent and going out. Usually, when they answer, they are in reality thinking to themselves what is a reasonable amount to be spending on this per month? We then advise them to keep a close eye on their spending for the next month or two and we give them a basic spreadsheet to record their spending habits. The idea is to then use this to compare their answers with their actual expenditure.
The majority of the time, we find that people are massively overspending, especially in areas such as socializing. Do you need to count every dirham? No. One of the reasons you moved to the UAE is for the lifestyle. However, if you don’t keep an eye on your habits, it will take a lot longer to achieve your savings goal, and that’s if you achieve them at all.
Below are seven budgeting tips that will help you to understand if you’re overspending in any particular area and how you can create an environment that will allow you to balance fun with sensible money management.
Keep it simple
When you make a budget, you should stick to your personal spending habits and expenses. You can create a budget spreadsheet using software like MS Excel or any other spreadsheet software. If you prefer pen and paper, go for it. Whichever method you’re comfortable with to keep track of your expenses, try to keep it simple and avoid adding hundreds of categories.
[Related: The 50/20/30 budgeting rule – Does it work?]
Try to consider your expenses for the entire month when you set your budget. This way, you can make allowances for all expenses and make real-time adjustments. When writing the figures down, try to be accurate. This will give you a clearer picture of your outgoings. You can then prioritize these to ensure the most important areas are catered to first. Be sure to include the non-monthly expenses such as rent and holidays. For example, if you travel for a holiday twice a year and your flights, accommodation, spending money equates to AED 12,000 in total, you should allow for AED 1,000 per month in your budget to cover this.
Keep a target and maintain an emergency fund
Everybody should work towards maintaining an emergency fund equivalent to three to six months of their income that is easily accessible to provide for them in times of financial turmoil. Whether it’s a holiday, saving for a house deposit or retirement, you need to be disciplined in your approach. Contribute a certain amount towards these goals each month. Deciding on your savings goals and working out how much money you need to achieve them is something you need to do in order to budget accordingly each month. Also, try to build in times when you can spend money on something special. For example, if you receive an employment bonus, take 10-15% of this and have fun with it.
Different bank accounts
Another great tip is to use more than one bank account keeping one for your monthly expenses and the other for you non-monthly expenses, emergency fund and short term savings. Ideally, this second account wouldn’t come with an ATM card. This removes the temptation to dip into these funds on a whim.
Clear debts as soon as possible
This sounds simple and if anything, common sense but people still keep large balances on their credit cards, which have incredibly high interest rates. Aim to clear outstanding credit card debt as soon as you can and then try to clear any credit you accrue each month.
Constantly review your budget
This is where a spreadsheet really comes into its own! Keep track of where you spend your cash and use the text messages most banks send out when purchases are made on cards to help you fill in the details of your income and expenditure spreadsheet. Regularly review your budget against actual expenditure to identify the areas where you’re overspending. You can then analyse when and why this occurs. Was it a miscalculation when making your targets or have you been spending frivolously?
Creating a budget will not solve your problems but the management and ongoing commitment to it will eventually develop a habit of awareness and gives you greater control over your finances. It only takes a little effort but it can have a huge impact on not only your general cash flow but also your financial future.
Maintain the attitude
Budgeting effectively means maintaining the right attitude. It’s important that you remain positive about this exercise. Be firm and disciplined and your spending habits will stay on track. For the first month, you may not be all that successful in following your budget fully. But don’t lose heart and try again the next month. Don’t give up too soon.
Remember that budgeting isn’t all about tracking your costs or recording them. It’s about prioritizing your expenses by understanding the difference between what you need and what you want. Never forget that your budget could be your ticket to realizing your financial goals.
David Noakes is currently the Head of Non-Medical at Lifecare International where he manages a department of specialists for Lifecare International whose services cover all aspects of insurance and financial services.