Dubai: If you look at your expenses and often ask yourself, "Is this much spending normal? Do other people spend this much on routine expenses such as food, housing, transport?" You’d be surprised to know that you’re not alone. Here’s why it’s helps to know in order to better your budgeting skills.
“Comparing your spending to ‘normal’ levels for households of similar income and family size can be a great way to spot areas for improvement in your budget,” said UAE-based financial planner Andrea Barber, who also independently coaches people on money-related issues.
“If you found out that you were spending twice as much as normal on food, cutting back on food expenses would likely be an easy way to bring your spending down. If the average household can find ways to spend less on food, than you should be able to as well.”
I have often wondered how much would be a good annual budget for a family of four? Based on tracking my budget, I initially had no frame of reference for whether this was ‘normal’ or not
How much of your salary should you spend?
Financial planners widely recommend that ideally you should be able to spend 50 per cent on critical, non-negotiable routine expenses, about 30 per cent on leisurely activities, with the rest allocated into your savings or a fund for emergencies.
The second most recommended advice is to spend the biggest chunk, 70 per cent, towards living expenses while 20 per cent goes towards repaying any debt, or to savings if all your debt is paid off. The rest 10 per cent is set aside for what you want after your essentials, debt and savings are taken care of.
“I have often wondered how much would be a good annual budget for a family of four? Based on tracking my budget, I initially had no frame of reference for whether this was ‘normal’ or not,” said Aditya Munjuluru, 44, an Indian expat who has been living in Dubai for over a decade.
But before getting to know more about other UAE residents and their saving habits and spending styles, let’s first figure out, on average, how much is it that households worldwide spend across different income groups or categories? Here are some relevant statistics that you can financially benefit knowing.
How much do people of different incomes spend?
Global consumer spending, especially on the more discretionary categories, tends to vary significantly by country, but when putting together data from surveys conducted by UK-based researcher McKinsey and global auditors like Deloitte, PricewaterhouseCoopers, these were the trends that were observed.
The surveys collected detailed data on how much people worldwide spend on routine expenses. They do this by collecting spending surveys per month and by gathering detailed spending diaries per year. This will help you figure out whether your expenses are “normal” or not.
“’Normal’ expenses vary a lot based on your income level and the size of your household. Global spending surveys provide data for different income bands called ‘deciles’. It is interesting to look at this data to see how households with really high income spend their money as well,” added Barber.
Comparing your spending to ‘normal’ levels for households of similar income and family size can be a great way to spot areas for improvement in your budget
How much of your salary are you spending on housing?
Although a monthly rent should consist of no more than 30 per cent of a person's income, as this is widely considered to be affordable, it may not be in fact the reality. According to UAE-based online realty platform Property Finder, individuals and families with a lower income ranging from Dh8,000 and Dh15,000 spend between 37 per cent and 52 per cent of their monthly salaries on housing expenses.
Meanwhile, households earning between Dh15,000 and Dh25,000 a month spend between 34 per cent and 49 per cent of their monthly incomes on housing, while residents earning between Dh20,000 and Dh35,000 spend between 27 per cent and 33 per cent of their monthly incomes on their homes.
How does your housing cost compare to "normal" based on your household income and your home's market value? Additionally, what to do if your housing expenses are not normal? (Note: We use the above low-, medium-, high-income categories to determines expense levels of residents in the UAE.)
How does your housing cost compare to "normal"?
“A drastic move to reduce housing costs would be to consider downsizing. If you are paying for more house than you need, you could move to a smaller house and save a significant amount of money,” said Andy Bail, a Dubai-based personal investments consultant and money manager.
“Another drastic solution is to move to a less expensive area. This would involve major lifestyle changes including finding a new job and placing kids in a different school.”
Munjuluru, whose salary falls in the mid-range indicated above, now sets aside about 25 per cent of his income on housing, which falls within the recommended range. But it wasn’t so before. “I once had to downsize to a house that cost less than my previous home and in doing so, saved money,” he said.
My total car-related expenses made up about 20 percent of my income, which is above the recommended range, but I went ahead with the purchase as I don't have any other debt or loans
How much of your salary are you spending on transport?
In general, experts recommend spending 10 per cent to 15 per cent of your income on transportation, including car payment, insurance, and fuel. For example, if your take-home pay is Dh4,000 per month, then you should spend Dh400 to Dh600 on transportation. To be sure, that range is simply for guidance.
Global surveys also show that households in the earlier-flagged lowest income decile (i.e. between Dh8,000 and Dh15,000) spent the least on transportation but faced a larger transportation cost burden, spending 26.9 per cent of their income on transportation compared to 10.4 per cent by the highest income decile (i.e. between Dh20,000 and Dh35,000) in 2021.
So based on the above average households pay for transportation, is your spending normal? Also, what to do if your expenses are not normal? “Consider trading in your expensive vehicle and getting a less expensive model. A car that runs and is paid off beats a car that runs and is not paid off,” added Bail.
Jaison Wilson, 37, another UAE resident, recently moved to Abu Dhabi and bought a car on a four-year loan. Jarvis, who falls under the high-income category flagged above (i.e. between Dh20,000 and Dh35,000), calculated that his total car-related expenses make up about 20 per cent of his income, which is above the recommended range.
However, Jaison went ahead with the purchase considering that he doesn’t have any other debt or loans. Munjuluru, on the other hand, had to trade in his expensive vehicle and got a less expensive model in 2017, which he personally felt to be a step that led to much savings that was later put to good use.
What percentage of your income do you spend on food?
“An average earner should spend 10 per cent to 15 per cent of his or her take-home salary on food for himself and his family. Obviously, the percentage will vary depending on the level of income and the size of the family,” explained Barber.
“For many people, food budgets are the most difficult to maintain because of impulse shopping and fluctuating prices. If you are spending more, look for ways to cut back. To control food expenses, you can plan weekly menus, use coupons and limit dining at restaurants.”
So it’s likely that you might discover after tracking your expenditures that you spend far beyond your budget percentages of 10 per cent to 15 percent for food. For example, on a take-home income of Dh10,000, a total food budget is Dh1,000.
UAE resident Rebecca Gifford, 45, who revealed her household’s income was in the high-income category (i.e. between Dh20,000 and Dh35,000), confessed that food expenses were the highest among other expenses for her family of four. She added that, upon calculation, it was well above 20 per cent of her household’s income, and that she has gradually started cutting back in order to save more.
Food expenses were the highest among other expenses for my family of four. Upon calculation, it was well above 20 per cent of my household’s income, so I've gradually started cutting back in order to save more
Both Barber and Bail agreed that keeping a regular tally of your expenditures might reveal you're spending a lot more in one category over another.
“For instance, your phone bill might be excessive or you might eat out regularly and end up with a skyrocketing food bill. Or, you might have a weakness for sales and discover those new dresses hanging in your closet have taken up more of your income than you realise,” said Barber.
“Knowing your spending habits, in particular when you're just beginning to budget, is a first step to developing a budget to which you can stick to.” If you're constantly overspending on your budget, Bailey suggested cashing out those categories and using the envelope system to hold you accountable.
“Just go to the bank and pull out the cash amount you've budgeted for that category, if you find yourself constantly spending beyond your means or the “normal” amount. Once the cash runs out, stop spending! It's the ultimate accountability partner,” he added.