Almost everyone is dealing with financial stress and uncertainness. Be it financial worry from job loss, increasing debts, unanticipated expenses, or due to a combination of these factors. According to the latest report by Amazon Payment Services (previously Payfort International), a regional expert in payment processing technology and solutions nearly half of the UAE residents are in debt and significant number of people are failing to save money.
Settling debts is not an easy one; this has worsened during with the pandemic. With limited source of income, borrowers feel difficult to make ends meet - ending-up falling into a vicious circle of debt by making mistakes such as taking another expensive loan to settle an existing one. People should consider the following to manage their debts:
Distinguish between "needs" and "wants". Compulsive spending can strain finances. Your credit card is meant to pay for things you need, not just for borrowing or to stay indebted. It is meant to be used wisely and avail of the benefits that come with the card (fuel, air miles, dining benefits, etc). Ensure credit card bills are paid on time, maximize your credit card repayments, set a sensible credit limit, and check credit card statements regularly.
In a rush to settle debts don’t forget to keep aside a part of your income every month in a savings account, to ensure you’re financially prepared to tackle any unexpected contingencies in life.
If you feel you’re drowning deep in debt, it is advisable to seek advice from the bank, as most of UAE banks have debt consolidation service. This will help the borrower consolidate all the existing loans/ credit card debts into one single loan- this will give you an advantage to pay off your loans conveniently at a low rate of interest and in small monthly installments. Also, remember not to borrow money from any non-registered lending entities.
Control your debt-burden ratio (DBR). It is the number of debt payments you have going out relative to your monthly salary. Fifty percent is the legal limit in the UAE. For example: if you have a salary of Dh15,000 ensure your debt repayments don't go above Dh7,500. Ideally, your DBR should be between 20-30 per cent in case you need any additional credit.
If you feel difficult to manage your expenses and struggle to save/repay debt every month, try the zero-sum budget. Prioritise your expense categories, with loan repayments at the top followed by basic household expenses, emergency savings, and all miscellaneous spending right at the bottom. The next step is to split your income based on these priorities, without leaving anything behind. Remember that every dirham counts when you're on the road to becoming debt-free sooner.
Lastly, never ever underestimate budgeting. Take a closer look at your financial statements - keeping track of your income and expenses can help you achieve long-term financial goals.
- The writer is the CEO of Policybazaar.ae