UAE: Better ways to budget your income after paying routine expenses

Dubai: Dubai-based chartered accountant Viren Bhatia is naturally wired to be cost-conscious due to his profession. With the emphasis on savings, a significant portion of his salary he puts aside for the rainy day and growing his family wealth.

"Despite being a chartered accountant, who believes in planning and budgeting to control costs in their organisations, I do not prepare a budget for my household expenses. However, that does not mean that I am not conscious of my regular and discretionary expenditure."

Budgeting idea #1: Have adequate provisions for all essential expenditures

Bhatia suggested that having funds allocated for all necessary expenses is a must. He has made provisions for items of essential expenditure that are rent, utilities, food, children's education, life and critical illness insurance premiums, mortgage payments and remittance to his parents.

“It usually takes on 70 per cent of my annual income. Once the above are taken care of, a portion of the balance goes into investments. Anything left after that is for discretionary expenditure.”

Budgeting idea #2: Regular investments should be on your necessity list and not made optional

He said eating out, entertainment such as watching movies in theatres and attending concerts, vacation and luxury items all come in his discretionary expenses. However, making regular investments is not discretionary for him but necessary to grow wealth over a long period to achieve specific goals or provide for retirement, Bhatia added.

"Our significant discretionary expenditure is once in a year family vacation outside the UAE. During the week we eat at home and eating outside is mostly on weekends. Fine dining is reserved for special occasions such as birthdays, anniversaries or outing with friends and relatives. Pre-COVID visit to theatres was mostly once or twice a month; however, now we entertain ourselves on streaming platforms."

However, Bhatia does not have any specific percentage set aside for discretionary expenditure as it depends on what is left after meeting his essential spending.

He stated, “When your children go to university, especially in the US where tuition fees are high, the amount available to spend on discretionary expenditure will be less. As your income goes up, the probability of discretionary expenditure will go up.”

Although COVID-19 has impacted many people's finances, being a conservative family, who did not have a significant discretionary expenditure even before pre-COVID times, their family has not been affected by the pandemic crisis.

Budgeting idea #3: Never impulsively buy things you can't afford on credit

Bhatia said many people with limited finances tend to believe that they can use credit cards to buy things that they may not be affordable otherwise. But this leads them to get sucked into a debt trap if they do not fully pay off the balances every month, he added.

"Hence, it is important to make judicious use of credit cards. Our family uses credit cards to buy essential items and thereby, take advantage of cash backs or any other rewards the banks offer on credit cards."

"We never believe in impulsive buying and purchase things only when considered them to be useful or necessary. We never get attracted by discounts, which motivate many to buy things you don't necessarily need."

"I think discretionary income is important because it breaks a routine. Meeting relatives or friends outside for lunch/dinner or watching movies/concerts is required. However, the decision on spending beyond essential lifestyle needs should be taken prudently and not made on spontaneous behaviors," he added.

Here money experts' share budgeting tips on spending for needs, savings, leisure and luxuries

Carol Glynn, finance coach at Conscious Finance Coaching explained that a disposable income is the amount of money a person or household has to spend after taxes. "For example, if you earn Dh10,000 per month, and as there is no income tax in the UAE, your disposable income is the full Dh10,000. If the income tax rate were 10 per cent, for example, your disposable income would be Dh 9,000."

Discretionary income, like mentioned earlier, is what is left of a person's income after all necessities like rent, food, utilities, clothing and transportation have been paid. It's the amount the person or a household has to invest, save or spend after these essential needs are taken care of.

In the example where disposable income is Dh10,000, let's assume this person's necessities add up to Dh6,000 in total (rent, food, clothing, utilities and transportation). In this case, their discretionary income is Dh4,000. This is the amount left to save, invest or spend on eating out, entertainment, gifts, travel etc.

Hassan Owais Kazmi, asset manager at Abu Dhabi Islamic Bank (ADIB), said it is vital to have disposable and discretionary income to lead a financially balanced life.

"Disposable income is what's in your paycheck; discretionary income is what's available after you pay for the basic necessities. When disposable income increases, it naturally leads to a growth in discretionary income as well. As a result, households have more money to either save or spend."

Budgeting idea #4: Take 50:20:30 rule as a starting point to use disposable income

While working with clients, Glynn first reviews their disposable income against the 50:20:30 rule of thumb.

"It is recommended that no more than 50 per cent of disposable income should be allocated to necessities (sometimes referred to as needs), 20 per cent ideally would be set aside for investing and saving, and the remaining 30 per cent spent on what we refer to as wants."

She explained that total disposable income is split 50 per cent to necessities and 50 per cent to discretionary income in the above example. The goal for the family is to feel comfortable in their finances and live within their means, without making too many sacrifices, she said.

“The important exercise is to be clear on what currently is a need or necessity versus extra wants for you as a family and household. Then work to prioritise your income towards the necessities and decide how to allocate the remaining income to wants and savings."

"If it is not possible to allocate your income with 50:20:30 rule now, use the understanding of your current financial situation, and set goals. Work towards making the required changes to utilise your disposable income in the best way."

Budgeting idea #4: If your disposable income is reduced, you must cut discretionary spending to protect yourself from getting into debt

Glynn said that if the household's disposable income is reduced, possibly due to a salary cut, or reduced hours, or worst case, a job loss, and necessities have not decreased. Then there will be less disposable income available. Hence, budgeting becomes essential, and the household needs to adjust their spending habits in line with the new level of disposable income."

She added that achieving the right balance isn't really about the value of your disposable income or your discretionary income, but being honest with yourself and conscious of how you currently manage money. It's then about being proactive enough to change your attitudes to 'essential' spending and making savings where possible."

Budgeting idea #6: Be more organised with your finances and invest your discretionary income in value-generating assets.

Owais Kazmi said that although it may take some time for this pandemic to run its course, there is an emergence of a new normal, living through the pandemic. "This is the time where one must be organised to support the fight against the pandemic and be wise in financial decisions. One should avoid impulse buying and leisure on borrowed money."

Organised financial management plays the most crucial role now than ever in these times. Owais Kazmi said, "Financial institutions have an opportunity to offer better savings and investment schemes with future benefits. Moreover, there are always pockets of opportunities for those looking for returns; a recent drop in the real estate market is one of them. People can buy their property and convert a cost into an investment."

Budgeting idea #7: Make adjustments in your living standards based on your income status; UAE offers multiple options

Disposable income in the UAE equals personal income as there are no taxes on personal income.

Sonny Zulu, Managing Director, Retail Banking, Standard Chartered UAE, explained that for calculating the needed disposable income for a small average family of four, it is essential to consider several factors. These include the emirate where the family is residing, as the cost of living varies by the emirate, the affluence status of the family, and the family's choices for schools, accommodation, etc.

For illustration, he said the assumptions would be an average family of four, resident in Dubai, which has opted for a minimum but reasonably decent living standard. Note that most unskilled and semi-skilled residents in the UAE have left their families in their home countries.

Zulu added that even affluent and high net worth individuals are left out in this example, as their wealth and choices tend to be open-ended, and the deviations tend to distort the average.

"Note that I have not included any travel/holiday, savings, or retirement planning in the example above. I have also not included clothing, discretionary subscriptions and other ad hoc (necessary) expenses."

"The advantage with the UAE is that residents have various options, and one can choose to live within their means by varying the options on accommodation, schools and so on. The UAE provides a wide range of options for one to adjust their living standards to fit into the available disposable income."

Budgeting idea #7: If you are deep in debt, set a debt elimination plan.

Zulu suggested managing your finances ahead of time and setting a monthly budget, including your necessities, to abide by. It helps you prepare for retirement and emergencies, realise your financial goals and ensures you don't spend money you don't have, he added.

"If more than 50 per cent of your income is going towards servicing debt, there will be very little disposable and discretionary income left. So, if you are deep in debt, it is never late to set up a debt elimination plan to help you pay it off as quickly as possible."

He recommended ensuring to pay the minimum instalment required on all your debt on time and then channel any extra money to pay off one debt at a time. "You may need to liquidate or sell some personal assets to help you pay off some debt. Do not wait until debt takes away your peace," he added.

"Even those who make four times their income complain that they need more money. There is, therefore, no such thing as enough money; it is only better planning," he said.