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Planning and Managing Money
Money Management
Managing your money
Managing your money is about deciding how to use your income to achieve your financial goals. Financial goals will be different depending on your situation i.e. level of income and also life stage. For example, your financial priority might be to pay your living expenses, or to save up for a large purchase or to repay borrowings.
Good money management and making good financial decisions has positive benefits for you and those around you.
- Better relations with family and friends
- Using money more wisely and not compromising your future financial plans
- Having a more stable financial future and peace of mind to deal with unexpected life events in the future
There are tools to help you manage your finances day-to-day, and to set financial plans in the medium and longer-term.
Day-to-day tools
For medium- and longer-term plans, financial planning will help you achieve your future financial goals.
Budgeting
A budget is a financial plan that shows a person’s income and outgoings for a defined period, such as one month. The main objective of a budget is to provide information that helps people to take control of their finances and make decisions such as:
- What they can afford to spend, repay and / or save
- What their financial goals and priorities are
- What to do if they are spending more than they are receiving
The main parts of a budget are income, expenditure over a specific period, and the difference between the two figures, which is the balance.
Income means money received and includes money from all sources including earned and unearned.
- Earned income is from work on either an employed or self-employed basis. For example, if you work for an employer you will receive an income and perhaps a bonus or overtime pay. If you are self-employed, you will be paid by clients or from the proceeds of the business
- Unearned income would be from other sources like benefits, pensions, interest on savings and returns from investments, maybe a family allowance, financial gift or loans (which must be repaid)
Expenditure means outgoings and includes money used to make payments, to repay borrowing and, or to save. Expenditure falls into three broad categories: mandatory, essential, and discretionary.
Mandatory expenditure
Mandatory expenditure means the payments are compulsory; they do not necessarily apply to everyone but if they do apply, they must be paid. Examples include medical insurance (citizens and residents are required to have health insurance in the UAE). Motor insurance and road tolls – motor insurance is a legal requirement for everyone who drives on public roads.
If people do not pay these expenses, they are breaking the law and can be fined.
Essential expenditure
Essential expenditure is spending on items that people need to live and includes rent or mortgage repayments on a home; food and drink; utilities (water, electricity), basic clothing and travel that enables people to earn their income.
The difference between mandatory expenditure and essential expenditure is that people have to buy these types of items, but they have a choice over which product to buy and which supplier to use. For example, you can shop around for the best prices on food and switch suppliers to get a better deal on electricity.
Loan repayments are also essential expenditure if people want to maintain a good credit history, also known as maintaining creditworthiness. People who have made frequent late payments or defaulted on borrowing products may find it difficult to obtain credit in the future. Providers may decline their applications or only offer them borrowing products with high costs.
People may also prioritise certain items of expenditure and add these to their essentials list; examples might include insurance to protect their possessions and life cover to protect their dependents when they die. People may prioritise certain types of saving, too, such as saving for their children or their old age.
Discretionary expenditure
Discretionary expenditure is voluntary spending on products and services that people want now, and saving towards items that they aspire to buy in the future. These items include fashion items, meals in cafes and restaurants, cinema tickets, music downloads, games, gifts, hobby equipment, holidays and other desirable but non-essential items. People may also save for high-value items they want in the future, such as driving lessons or a wedding, or putting down a deposit on a car or a home.
Steps to creating your budget
It is helpful to set out a budget so that income is at the top and expenses are deducted in order of priority – that is, mandatory, essential and discretionary with the balance at the bottom. Setting out a budget in this order allows you to identify which expenses you have no choice over and which you could change.
Once you have prepared your initial budget, you can address any imbalances by changing the amounts allocated to different expenditure. These changes will be determined by your financial priorities - such as to save, to live within your means or to repay borrowing.
An example budget for Osama
| Description | Amount (AED) |
|---|---|
| Income | 27,000.00 |
| Mandatory expenses | |
| Car insurance | 150.00 |
| Road toll | 150.00 |
| Essential expenses | |
| Mortgage repayment | 4,000.00 |
| Buildings and contents insurance | 70.00 |
| Life cover to repay mortgage | 80.00 |
| Life cover to protect family | 250.00 |
| Water supplier | 500.00 |
| Gas and electricity supplier | 850.00 |
| Telephone (landline) | 360.00 |
| Own mobile | 300.00 |
| Car loan repayment | 1,300.00 |
| Petrol | 600.00 |
| Discretionary expenses | |
| Saving for gifts and emergencies | 3,500.00 |
| Day-to-day expenses | 2,500.00 |
| Cafes | 400.00 |
| School Fees | 3,500.00 |
| Charity | 200.00 |
| Total Expenses | 18,710.00 |
| Balance (income minus expenses) | 8,290.00 |
The balance on Osama’s budget is AED8,290. In practice, he sometimes has a few dirhams more left at the end of the month and sometimes he has a few dirhams less. This is because the amounts he spends on petrol and day-to-expenses can vary a little from month to month. Osama’s goal is to balance his budget so he aims to keep his spending within the amounts listed on his budget.
Monitoring Incomings and Outgoings
Once you have created a budget for your planned income and expenditure, your next step is to monitor your actual incomings and outgoings to see if you want to change your budget and / or your financial habits. To track incomings and outgoings you can view current account and credit card transactions online and on paper statements, keep receipts, record transactions, and check account balances at an ATM.
Dealing with a debt deficit
Mariam chose to borrow AED300 a month on an overdraft when her budget was in deficit. Her essential living expenses plus her discretionary spending on socialising and fashion were greater than her income. When Mariam found that she could not repay her borrowing easily she decided to reduce spending and spread the cost of repaying her debt over a longer period.
If people decide to reduce spending, they are more likely to be able to cut back on discretionary spending than essential spending. Even within the essential spending category, however, they may be able to reduce costs – for instance, by spending less on food.
Budgeting Tips
With budgeting it is good to adopt the “50-30-20” budgeting philosophy. It is a simple and efficient tool for budgeting, saving and spending. The philosophy includes 50 percent for "needs” or essential expenses, “wants” should make up another 30 percent, and savings and debt repayment should make up the final 20% of the budget. This budgeting philosophy will ensure spending is minimised, debt is handled if required and savings start
FAB Useful Tips on How to Save Money in the UAE
- Increase AC temperature by 1oC to lower cooling bills
- Negotiate your rent at the time of renewal
- Browse discount websites for deals
- Pack lunch for school and work
- If you order take-out on apps, filter for offers
- Buy pre-loved items whenever you can
- Plan big purchases around Ramadan, GITEX and Dubai Shopping Festival for great deals
Cashflow Forecasting
Budgets tend to focus on one time period like one month. You can use cash flow forecasting to predict incomings and outgoings over several time periods for example, three or six months or one year, to identify:
Budgeting apps
A budgeting application is a great tool to keep income and expenses in check. To ensure a budgeting tool is useful it is important to keep it up to date.
Main features of a budgeting app
- Creates a holistic money management system
- Create a plan to help pay off any outstanding debts
- Careful tracking of all bills
- Provides a succinct dashboard to give a solid, real-time overview of your finances
- Identifies any monthly spare amount to put into savings
The benefits of using a budgeting app
- Easy to use
- Organise your income and expenditure details
- Helps you to save more by stopping unnecessary expenses
- Easy to find mistakes with data entry
- Motivates you when your finances are under control
- Helps you become more confident to make financial decisions
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