When it comes to taking control of your finances, the obvious, but frequently overlooked first step, is to take a long, hard look at your monthly budget. Quite simply, if you don’t know what your outgoings are, how do you know if you are overspending? How do you know how much money you have available to spend each month?
This article provides a guide to working out your budget and reducing wasted expenditure. Life in the UAE is expensive and we can all benefit from reminders of how to manage our heard-earned income a little better.
Get started by following these steps:
- Calculate total household income – after tax if payable. Unless a bonus or commission is guaranteed then it is usually best to work on what you actually take home.
- Deduct rent and/or mortgage payments.
- Deduct loan and credit card payments.
- Gather together bills to establish average monthly payments.
- Calculate what you spend on food, going out and entertainment.
- Don’t forget costs such as life assurance, savings plans, gym and club memberships.
- Separate monthly payments into fixed or variable so you can make adjustments.
- Make an allowance for annual expenses, such as motor insurance, medical cover, gifts, travel and holidays.
- Calculate the income left after all expenses which is your disposable income.
There are various ways you can do this. A sheet of paper will work as well as a spreadsheet or an app, although many people find it useful to have an app on their phone that they can update as they spend. Bear in mind that you will need to do more than just download the app; you need to actually use it!
If you have never done this before you may need to do it over a few months to get a proper idea of all outgoings as it is rarely the same amount every month. Working out what you actually spend and where it goes, which is often different to what you might think, gives you an opportunity to see where money is being wasted.
These are some of the main areas where you can reduce expenditure:
- If you have several credit cards do you really need then all? Fewer cards can mean fewer annual fees which you will usually pay even if the balance is zero.
- Are you paying off your credit cards in full each month? If not you are paying high rates of interest and if you are only paying the minimum amount they will never be paid off in full. Get the cards paid off and save all those wasted interest payments.
- If you have balances outstanding on several cards choose one to pay down in full at a time, obviously keeping up the minimum payments on others. I would suggest the one with the highest rate of interest first, then in time you’ll save all that wasted interest.
- Build up an emergency fund so that you can survive in case of unexpected expenses. This should be a priority.
- If you have a mortgage, is the interest rate competitive? Offers are available and can reduce the interest payments so you can repay the debt sooner.
- Can you reduce your food bills? Just about everyone can by shopping wisely. Try other supermarkets, plan your meals, shop seasonally and locally.
- Be aware of reduced speed limits on many roads so you don’t get caught out and waste money unnecessarily on the increased fines.
- Stop impulse buying. Before making big purchases walk away for 30 minutes and decide if you really want and need that item.
- If you are too tempted every time you go to a mall, leave the credit card at home. Give yourself a cash limit for spending so you have to stick to it.
Once you have reviewed your spending the amount left over is not just what you can spend but also what you can use to repay debts and plan for your future. Governments and businesses keep budgets for very good reasons, and individuals and families will benefit from doing the same.
Budgeting is not about scrimping but about making smarter choices for your hard-earned income. Once you have a grip on income and are managing outgoings you are then in a position to start making good decision and planning for your financial future, and that of you children.
To arrange a meeting, or for advice on any personal financial planning issue, please email me at email@example.com
A version of this article appeared in Good magazine in early 2016.
You can find a recent article focusing on seasonal spending here: Seasonal spending: 20 hints & tips on budgeting