During this meeting Ricardo shared with the members of the group “Common Sense Personal Finance and Investing – the Bogleheads® UAE Chapter” his experience about budgeting and saving in the UAE.
We have summarized the discussion below and broken down the steps that need to be taken to bring personal finances on track.
Step 1 - Understand your expenses
Although it may seem too obvious to list, most of us often underestimate our own expenses. We feel that we are in control of the regular expenditures, but probably most of us wouldn't be able to tell how much exactly do we spend monthly on groceries, dining out, etc [list any other category here]. The more-or-less figure would probably be easier to give, but it most likely be lower than it actually is.
Ricardo's recommendation:
a. Tracking your expenses in detail is the very first step in taking control of your personal finance. Usually 3 months of regular tracking gives a good understanding of where the money goes.
b. You can’t manage what you don’t measure.
c. There are many ways of tracking expenses: on a paper/book, in Excel, with the help of an app, etc.
d. In some cases, you can use you debit and credit card statements to
track your expenses (depending on your bank, some software can
help you do that).
e. Examples of phone apps include: Pocket Expenses, Wallet, You Need A Budget (YNAB) – this last one functions like Mint (phone and computer app), but synchronising with the bank account is a paid function.
f. Expenses should be broken down into categories for better
understanding. Some parameters to consider are:
Fixed vs variable expenses
Daily (e.g. small purchase) vs monthly (e.g. phone, cable, rent) vs yearly (e.g. rent) vs miscellaneous expenses (e.g. holidays, big purchases)
Spending categories (e.g. groceries, transport, dining out, entertainment, clothes, etc.)
Step 2 - Understand your income
We all understand that with a higher income makes it easier to win the game. But lower income isn't a deal breaker!
Recommendations of Ricardo:
Look for a possibility to create income. Sometimes even as simple as looking around you and deciding to 'get rid of' (a.k.a selling on Dubizzle) some things that you own and don't use any more. Rows of old DVDs on your shelves? Sport equipment not used since many years? Fancy kitchen equipment stored in a box on top of the kitchen cupboard since months? Sell it - create income! There are indeed many other ways to create income. It's all about creativity.
Step 3 - Start Budgeting
Having collected sufficient data on our expenses allows us to understand where we spend most, if the spending are necessary and, if the aim is to save more, where to cut the expenses. This is a good moment to create a budget.
Ricardo Recommends:
a. Review your expenses from last few months and compare spending on the same categories, month to month.
b. Make an estimation for the next month/week budget based on your spending history
c. Adjust the budget to a specific month, e.g. if Christmas is approaching, you may need to budget more for gifts or, if you realise you have no capacity to budget for additional gift expenses you may need to get creative with your gifting!
d. Make sure that one of the budgeted categories is called "Savings" and try to budget it to be as big as possible :-)
Step 4 - Understanding your goals
It's hard to disagree - having a goal towards which you want to save money will help the motivation to reduce expenses. So answer these two questions:
How much do I need for [next holiday/car/ mortgage down payment/ wedding/child's school fee, etc]?
When do I need the money?
Examples of goals: Paying off debt; Building an emergency fund; Saving for a big purchase; Saving for retirement; Saving for other investment.
Step 5 - Review your budget and expenses on a regular basis
..(e.g. monthly) and adjust where needed. Now that you have the information you can make better decisions. Depending on what the aim is, you may want to make some commitments on cutting down/optimizing some of the categories, by deciding to make changes.
Ricardo gave few examples of where it is easiest to cut expenses (because in these categories the expenses are the highest!):
Eat out less and cook at home.
Take a lunch box with you to work instead of buying lunch at work
Invite friends for home made meal, or organise a pot-luck meal to make it a social weekend brunch instead of paying for a brunch
Consider using more public transport instead of taxis
If you realise that you are spending much more than earning, or if you want to make a bigger difference, you are probably in need of larger changes to your lifestyle. You may want to consider:
Moving to a cheaper apartment/cheaper area of town
Downgrading your car (or getting rid of it?)
Cancelling some travel plans for the year
During the meeting we discussed ideas, answered questions asked by the group and shared experiences:
- Setup a separate savings account, to separate the savings from your current account
- Setup automatic “savings” transfer, to avoid spending more than planned
- Plan big expenses in advance (to avoid getting debt on a credit card)
- Question every expense and every expense category. There is always a way to reduce your expenses further, sometimes with a bit of creativity.
- The importance of having a financially responsible partner in life, or how to bring your partner on board of financial responsibility
- Think about the future value of money
For example with the rule of 72 we know that for an assumed investment return of 7%, 1000 AED today is worth 16000 AED in 40 years
We also know that, if we use the 4% safe withdrawal rule, we actually need 25 x 1000 AED = 25,000 AED saved and invested to fund expenses of 1000 AED per year
The discussion continued on various topics such as budgeting for a small business, or creating a mindset to challenge yourself to NOT spending money on particular habit for a certain amount of time: i.e. "I will not buy any shoes for 6 months".
Overall the meetup covered many aspects of personal finance and everyone found it very useful. Ricardo did a great job sharing his personal experience and facilitating the discussion. It is definitely a topic we will talk about more in the future!
Thanks a lot Ricardo and see you all next time!