A survey conducted by MyMoneySouq, an online aggregator of financial products and services, in the last quarter of 2020, highlights the experiences of over 440 individuals and families in the UAE.
The sample size is small, and yet it is reflective of the attitude of a larger section of people. Of the 442 surveyed for ‘How Covid-19 is impacting you financially?’ nearly half, at 45 percent, said they had no savings at all, and 53 percent said they will need additional funds (through credit cards or loans) to manage their expenses in coming months. More than 80 percent of people said that their incomes were affected by the pandemic. And only five percent of those surveyed said they have savings to survive a year.
Such surveys are telling examples of how people at large handle their incomes.
This year is an opportunity to probably start afresh and make conscious efforts at putting our finances in order if they are not.
Clean financial life
Budgeting and tracking your spending habits are two of the most powerful ways to take control of your finances. “Zero-based budgeting can be an effective method in which all expenses incurred must be justified while each new expenditure must perform a purpose, in line with your overall long-term plans. The idea behind this approach is to analyse the needs and repercussions of every dirham spent within a pre-defined framework while allocating cash accordingly,” says
Arun Leslie John, Chief Market Analyst, Century Financial.
First step is to eliminate or reduce bad debt to a minimum (mainly credit card debt), says Amit Mitbawkar, an independent Dubai-based financial advisor.
“If you want to take advantage of credit card offers from banks, make sure you to pay it off in full every month. You can only do this if you keep a track of your total monthly spending, and not go over the budget of what you can pay in full at the end of the month,” says Mitbawkar.
“I use my credit card to pay for almost everything I buy because it gives me a good amount of cashback. But, I make sure the amount is something I can pay in full at the end of the month, without paying interest to the bank,” he adds.
Saving money can be an uphill battle while ensuring stability in finances, as short-term gratifications can easily become a temptation to deviate from long term goals. Instead of making saving an afterthought, make it a high priority item in your budget.
“The best way to build an emergency fund is to transfer half of your disposable income into a savings account every month,” suggests Mitbawkar.
Disposable income is the amount remaining after your expenses are taken care of. So, for instance, if your salary is Dh30,000, and you spend Dh20,000 a month, your disposable income is Dh10,000 a month.
“Transfer half of this into a savings account each month till it reaches six to nine months of your salary. When it crosses that amount, invest the rest,” adds Mitbawkar.
Shield your income
Following a pyramid approach using a tier system can shield household income amidst volatility. “As a risk-averse individual, one should start with a necessity bucket, which likely includes semi-fixed expenses such as rent, utilities, groceries, and funding your savings accounts. After determining the base bucket, you can create other spending buckets, such as a recreational bucket which gets the remaining funds,” says John. This will ensure that necessitates are prioritised while assets are built over time.
Avoid these two common mistakes
Don’t lend money: “Lending money to friends is a surefire way of losing money. If you want to lend money to someone, make sure it’s not part of your emergency fund, and it is money you are willing to write off without affecting your finances,” says Mitbawkar.
Don’t take a loan to invest: Investing by taking a loan is another recipe for disaster. Don't invest emergency fund money in any asset, no matter how good it may seem.
It pays to remember that the higher your emergency fund, the lesser your financial stress will be. “If you lose your job, or experiencing money flow issues in your business, your emergency fund should allow you to manage your expenses without an income for nine months to a year, or until you get a new job or business recovers.
As you set your long-term financial goals to shield household income, it is important to review their progress regularly. Personal finance rules can be excellent tools for achieving financial success. However, it is important to pay heed to your financial goals and objectives over short-term gratifications.
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