Making a squeezed budget work

In these times of economic uncertainty hanging heavily, most of us have been tightening our belts. It's the right thing to do when we are not sure if the breadwinner of the household will still have a job at the end of the week, or if a pay cut will throw a spanner in the financial works.

Our budgets are already squeezed, paying for the usual daily and monthly expenses, some of which continue to be high. Sure, there has been some easing of rents, providing much-needed relief, but that's only for those who have been able to get out of their contracts and move out to a cheaper and decent accommodation.

Food prices have varied; school and college fees continue to spiral up. It's still not easy on many middle and lower middle class families in the country, many of whom have heavy commitments back home.

Families are making adjustments and trying to save in different ways. But sometimes there arises a situation when even that small bit of saving falls short.

It could be a sudden major illness afflicting a family member here or back home, and it's a struggle, particularly for those who do not have medical insurance.

Or it could be the repair of a major breakdown of your car or some unexpected house damage. Suddenly you realise you don't have enough in your bank to meet these extra costs.

Commitments

The family of S. Ganga, who teaches in a private school in Dubai, has a number of commitments back home in India, including paying a mortgage for an apartment, financially supporting his family and paying for his different plans and investments, leaving very little as savings.

He has not been too perturbed about having meagre cash savings so far, as he takes good care of the usual expenses in Dubai as well as because he has done some basic future financial planning, including a roof over the family's head, an empty plot he bought in his native city Chennai meant as an investment, health protection, and some contribution towards a retirement fund.

The unexpected happened last month.

He was visiting India for his summer break and a close family member fell seriously ill for which he had to extend considerable financial help.

That meant finding money from an already extended budget, Ganga, 42, says, which was not easy. He had to part with the cash meant for another household purpose. And, unfortunately, the cousin passed away.

"Squeezing money out of an already squeezed budget can, for many, be like getting blood out of a stone," says Gurnos Stonuary, business services director, Nexus Group, Dubai. Then he poses a question: "But is it? With a little thought and a few ideas, can we really make that extra dirham?"

Emergency fund

Financial advisors cannot stress enough the importance of setting up an emergency fund to meet such unwelcome circumstances.

The usual recommendation is to have a fund of about three to six months of income saved, which requires a determined effort towards saving. There's a case for saying that saving for all situations - for now and for retirement - should be the overarching mantra in our lives.

"If you have no savings and are working, it isn't too late to start building up an emergency fund," says Keren Bobker, senior consultant, Holborn Assets Insurance Brokers LLC, Dubai.

Stonuary agrees. "As soon as you can plan, plan to put an emergency fund in place. It can cushion the difference between your income and outgoings, especially if you lose your job. Simply put 10 per cent of your monthly pay into savings and aim to have at least one month's salary saved by the end of the year."

In most cases that definitely means making cuts to some part of monthly expenses. "Start by identifying 15 things on which you spend money and cut down the spending on each one by, say, Dh10 per month," Stonuary adds.

Sounds almost too simple for words. But at the end of the month, that adds up to Dh150 and at end of the year you will have saved Dh1,800. For a lot of people here, that's a tidy sum.

Once you have an emergency fund in place, Stonuary adds, you may want to start an "air ticket fund", "holiday fund", "new clothes fund", and "debt reduction fund".

Biggest pressure

One of the biggest emergencies people face is the death of a breadwinner. And so, the main provider for a family and all parents, says Bobker, should have some life cover in place so that their dependents are not left destitute. "Basic life cover is cheap starting from just Dh50," she says.

For those who don't have health insurance, the general advice would be to go for one if you can afford the very basic plan.

Bobker says that those who can't afford that in the UAE should, at least, apply for a government medical card. All residents are eligible to apply for a card which entitles them to low-cost treatment at government hospitals and clinics. Cards are valid for a year and cost Dh100-Dh200 for children depending on their age and Dh300 for adults. Citizens of the UAE pay even less.

But if one of those sudden, unforeseen situations arise and somehow you have to find that extra cash, check out some options that may be available to you in your savings plan, if you have one. It would, however, depend on what kind of savings plan you have.

"If you have a regular premium savings plan, ask your provider if you can take a payment holiday," Bobker says.

"Many plans have provision for this, after the first few years, but check that you won't be disadvantaged by way of penalties before doing so. In certain cases you can simply suspend premiums for a few months and then pick up where you left off, but the monies allocated can be used for something else."

It has been known that some banks in the UAE, especially among the local ones, offer a payment holiday of a couple of months on personal loans or mortgages, particularly over the hot summer months and/or Ramadan. It could be worth asking your bank if they offer such a facility.

Similarly, many schemes allow lump-sum withdrawals, giving an option to those financially stranded, she adds.

Lump sum

"After all, your savings are there to assist in the bad times. Again, you will need to take advice to ensure that you are not being penalised. If you invested a lump sum, you can also take a partial withdrawal."

Unexpected situations can get sticky for people who are in debt. In cutting down expenses in order to save towards an emergency fund, it is important for many individuals and families to check out what they owe.

"If you owe money where you have to pay high interest, for example a credit card, use whatever money you can to reduce the outstanding money and stop paying interest. Each month always pay more than the minimum and the more the better," Stonuary says.

Also, he points out that many of us keep money sitting in an account where it attracts zero or a very poor rate of interest while having debts that incur a higher interest.

"Although this is not logical, people like to have the comfort of having 'money in the bank', but really need to use this money to clear away debts which are costing them far more," Stonuary says.

So, what about using credit card as an option? To financial advisers, it's not the preferred option and is only the last resort.

"The last port of call would be a credit card, Although this can provide money quickly, you do pay in return very high interest rates," Stonuary points out.

Keren Bobker adds: "Whilst I am wary of telling people to use credit cards and build up debt, in emergency scenarios they come into their own. In an ideal world, credit cards balances are kept at zero or repaid in full every month, just so they can be used for emergency bills and purchases."

Both say that one should at the very start explore the option of selling something to get cash when under pressure.

"If you have items in your home that you no longer use or need, you can sell them," Bobker says. "Sort out unwanted items, such as electronic goods, children's toys, books, furniture and clothes. You can advertise using notice boards, sell them online, join an organised table-top sale or, if you have enough items, host your own garage sale."

There's another port of call. Don't rule out asking for help from an employer, says both Stonuary and Bobker. "Some people may be lucky enough to have an employer who will advance them monies or who will allow paid overtime," she says.

Goal

But saving for the short, medium and long-term should be the goal of everyone, individual or family.

"Start saving something today, never mind how small. It does not have to be a large sum," says Stonuary. "When you are on the tightest of budgets, a small amount saved adds up over time."

"Make saving a family affair," he adds. "Set a family goal as well."

Clearly, it's a good habit to get into, at any time, even if not in a totally regimented way. It might make a big difference someday, and in any case can ease your mind in the meantime.

Preparing for emergencies

If you were to need a loan for an emergency, there are a few options available: