For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who see it begin to mock him, saying, ‘This man began to build and was not able to finish.’
Luke 14:28-30
To be successful, you need 3 things.
- A budget
- Discipline
- A well defined goal
Everything starts with a plan. The bible teaches and encourages us to have a realistic plan for anything we need to accomplish. People come to UAE for a variety of reasons. However regardless of the reason(s), I think we all would agree that the common goal is hoping to make some money for use later in life (think retirement for example). What many fail to understand is that stability isn’t exactly synonymous with UAE. I would strongly advice that you must always have 3 month exit plan (consider the next 3 month to be your last 3 month in the country)
The 1st key to success starts with a budget. Many come and unfortunately forget the key principles to success . Those principles can be summarized in the following 3 points
- Have a balanced budget.
- Live within your means.
- Avoid debit that doesn’t generate value/income.
The aim of this article is to discuss those 3 key points in hope they would help the reader in setting proper and realistic budget and a plan.
Having a balanced budget
Not having a budget, specially in UAE, is major cause of pain for countless many. Drawing a spending verses income budget seems to elude the majority though it sounds very simple. To do one, all you need to are:
- Have basic knowledge of Excel
- Documenting where your currency is being spent on a daily/monthly bases.
- A cup of tea/beer/coffee.
- An hour of quite time.
Many feel that regardless of budgets, their income seems to evaporate literally. It is as if there is a black hole sucking all the Dirhams in their bank account, isn’t it?. Many set up budgets that later proves to be useless. From talking to several people, I came to the conclusion that many struggle between what they wish for and what they really do. Thus many end up with budgets that looks nice on paper/excel however they are useless.
The key to having a successful budget is being truthful about your spending and goals. Detailing your spending will open your own eyes to things your never noticed before. Another thing is that you need to understand that life in UAE ,and Dubai in particular, is based on the WoW effect. Everything is designed to WoW you and fool you into chasing luxury. Life in UAE can and will bankrupt you if you are not paying attention to your spending regardless of your income level.
The basic items of any budget for a family of 4 (2 adults and 2 kids) would be
- Charitable contributions
- Car loan installment #1
- Car loan installment #2
- Personal Loan(s) monthly installments
- Rent
- DEWA/SEWA/FEWA
- Home DU/Etisalat
- Groceries
- Husband mobile phone bill
- Wife mobile phone bill
- Home A/C
- Home cooking gas
- Home waters bottles
- Fuel
- Car #1 insurance renewal
- Car #1 RTA inspection and registration
- Car #1 service
- Car #2 insurance renewal
- Car #2 RTA inspection and registration
- Car #2 service
- Child #1 school/nursery
- Child #1 school misc. (uniform, bus…)
- Child #2 school/nursery
- Child #2 school misc. (uniform, bus…)
- Eating outside
- Shopping (cloths, shoes, watches, phones…etc.)
- Entertainment for the kids
- Entertainment for the adults (anything else that does not involve kids)
- Vacations (hotels, air tickets….)
- Annual subscriptions (Clubs, TV…..etc..)
Your aim from the above mentioned budget is to make sure the overall annual spending on the above mentioned items is BELOW your total annual income. I have built an excel sheet with the items above. Click the Download button below to download the file and feel free to modify it to fit your needs and use it.
Living within your means
This is a controversial topic. When I tell people they need to live within their means, many look at me either as if I am snatching something from their hands or that I am talking gibberish. I will try to explain what I mean by living within our means.
Now that you have wrote down your family budget with your spouse, you need to trim it down. Your aim is to have at least 10% saving annually if not more.
There are some tips to how to achieve the 10% saving target. Those tips will help you understand if you are over spending on any of those 30 items (or any other items).
For example, lets take the big ticket items. The biggest item of all is RENT. Although the standard globally for rent to income ratio is at 30%, you should not never pay more than 25% of your annual income toward rent. Please consider that the 30% rule is set mainly to help landlords with their investments returns and not necessarily to help you with your savings expectations so be smart.
Based on the above, a Townhouse/Villa or an apartment? You need to understand the cost associated with each of these choices. For example a Townhouse/villa might be way more expensive to compared with an apartment and I am not only considering rent here. Other associated items are DEWA for example. Your DEWA bill for a Townhouse/Villa will be higher than an apartment with the same number of bed rooms. The same applies to everything else like maintenance, A/C bill… etc. The choice is finally yours but please sit down and think about the associated costs and consider the 25% rule if you really want to save.
Now for a family, the 2nd big ticket is EDUCATION. Education in UAE is expensive. It can even be in certain circumstances cost more than rent! All of us want our kids to have the “best education” however this “best education” is an elastic term. Generally speaking, regardless of assistance level from your company regarding this topic, you should be realistic about your choices and their associated costs. For my family, 10% is our max spending on education being school or nursery. This rule helped us greatly in filtering school/nursery options for our daughter. That rule helped us choose the school and before than the nursery for our daughter. Today she goes to Raffles World Academy and before that she was in Pre-KG at Odyssey nursery (5 days a week from 8 AM to 2 PM).
I would suggest an annually balanced budget for a family of 4 should look like
- 20% rent
- 10% Education
- 10% Food
- 8% Utilities (DEWA + Internet + Phone bills + TV subscriptions + A/C + gas + water)
- 2% Fuel
- 15% Loan installments (car loans, personal loans….etc..)
- 5% Shopping (cloths, shoes….etc.)
- 10% entertainment and family trips
- 3% Dinning out
- 2% car related expenses (insurance, registration, service… etc.)
- 15% saving
Avoid debit that doesn’t generate value
Debit is sort of a way of life in UAE. From buying a car to paying rent or paying for your kids education, you will be tempted to get a loan here and there. There are, however, few rules that helped me over the years since 2007 when it comes to taking in debit.
- Never take ANY loan of any kind that you can’t not close in 1 year.
- Never take a car loan with a 5 year payment plan.
- With an average 2.5% in annual interest, a 5 year car loan will acquire approx. 13% in interest alone. Add the % of car value depreciation and % of annual inflation rate over 5 years, and you will be at a deep loss regardless of how much you can sell your car for after 5 years.
- Considering the car value and your income and debit ratio, I would suggest you never take a car loan with anything more than 3 year payment plan (I personally take 2 year payment plans)
- Never take a personal loan more than your gratuity amount
- So you have been in UAE for sometime and you have been working for the same company for sometime, and now want to take a personal loan. This is OK however the golden rule is you must always have 3 month exit plan. Based on this rule, never ever take a personal loan that is more than your end of service gratuity amount plus interest.
- Never take a personal loan with a payment plan over 1 year.
- The average % for a personal loan is 5% (flat rate). Nov consider taking a personal loan at that rate over 3 years, let alone 5. For 3 years, you will be paying principle plus 15% in interest. Similar to car loans, if you add the % of annual inflation rate over that period, you will discover you will be nick deep in losses even after paying the loan back.
- Full disclosure. I personally have personal loan @ 4.3% flat rate which I used to setup a small investment portfolio abroad. It is less than my gratuity amount plus interest and the loan is being paid back over 1 year. This way I am actually making money out of the loan rather than losing money. (This concept will be discussed in details later in another article about investment tips)
- NEVER EVER let your total monthly loan installment cross 30% of your monthly income.