When it comes to budgeting, Mr Micawber in Charles Dickens’ 19th century novel David Copperfield said it all.
“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
Yet a surprising number of people have no idea how to budget, say financial experts in the UAE. Here is a step-by-step guide to help you manage your income and expenditure more effectively:
Step one: creating a budget
First, you need a good idea of what you are spending your money on currently.
“To start with, use an income and expenditure sheet. It’s easier to just find a template, otherwise you miss things,” says Rasheda Kashtun Khan, a debt panellist for The National and an independent wealth and wellness planner who runs the Dubai-based company Design Your Life.
Jamal Avli, fellow debt panellist and the chief credit officer at Abu Dhabi Islamic Bank, advises working out your average monthly income, including salary and any profits from investments.
“Next, calculate your fixed expenses, or expenses that remain constant from month to month – this would include things like rent, mortgage payments, savings contributions and education,” says Mr Alvi, adding that you must then include non-fixed expenses, those that vary from month to month, such as utility bills, groceries, fuel and repair costs.
“Finally, add in any monthly payments on debt or other forms of financing, as well as your spending on non-essential items like dining out and vacations.”
Now add all your expenses together and subtract them from your income – a negative result means you may be living beyond your means.
There are various ways to record your expenses. You can use a personal finance app like Wally, or keep your receipts and analyse them on an Excel spreadsheet.
It is a good idea to monitor your spending for at least two months to account for any irregular expenses.
“A lot of people don’t even know where they spend money, so tracking what you do for a month will actually give you an idea and even give you the realisation that maybe you are spending somewhere you shouldn’t be,” says debt panellist Ambareen Musa, the founder and chief executive of money comparison website Souqalmal.com.
Step two: saving comes first
Once your budget is complete, now you can identify where to cut costs.
“The other thing to consider is what you should be spending on that you are not. For example, savings, emergency funds, your children’s education. People think savings is the last thing. But actually it should be the first expense. If you think about it, it is actually just a future bill,” says Ms Kashtun Khan.
A separate savings account is a must and you should transfer money to it as soon as you are paid to prevent you spending. A good rule of thumb is 15 to 20 per cent of your income each month.
Step three: planning ahead
You should also have a separate account for expenses like rent and school fees, which are fixed and due at predictable times. In general your biggest expense should be housing, with around a quarter of your income going to home finance payments and insurance or rent, says Mr Alvi. If you have any debts, Mr Alvi recommonds allocating only 8 per cent of your monthly income to paying them back.
Money for travelling should also be kept in a separate account, as should cash for emergencies.
To know how much to transfer to these accounts, you need to work how much you spend on them each year. If you go on two holidays a year totalling Dh24,000, transfer Dh2,000 a month to your travel account and dip into it as needed, suggests Ms Kashtun Khan. Do the same for all the rest. Your emergencies account should ideally have enough money to cover three months’ household expenses. Start with one month and build it up over time.
Step four: budgeting for the everyday
Assign mini-monthly budgets to things like entertainment and take the money out when you need it. Or you could keep cash in an envelope at home.
“Let’s say you are going to spend Dh2,000 a month on entertainment. Every week take out Dh500. The moment that Dh500 is finished. It’s over for the week. You stay home,” says Ms Musa.
If you do not want to go down the cash route, put all your spending on a credit card – provided you pay off the full balance each month.
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