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A budget can reduce tension around money and help you meet your long-term financial goals. A new year is a good time to start

 

After 2020's unexpected events, January represents a welcoming new start. It is also a good time for UAE residents to create a new personal budget.

At its most basic, a personal – or household – budget simply tracks money coming in versus outgoings or expenditure. However, with a few simple hacks, you can easily upgrade that plan to factor in retirement, personal finances, and ad hoc expenses. This article covers how to create a personal budget in the UAE.

But why do I need a budget?

When you're not running a country – or a company – you don't need a financial statement, right? Wrong. A budget puts your money to work to help fulfil your dreams while you live the life you want. Done right, a budget works as a financial roadmap that promotes responsible money management.

Consider, for a moment, the chaos you would face without scheduling your daily appointments. A budget offers the same convenience for your money.

How do I create a budget?

A good budget starts with proper planning. The US senator Elizabeth Warren, a champion of social finances, recommends the simple 20/50/30 approach in her book, All Your Worth: The Ultimate Lifetime Money Plan. Allocate your monthly income as follows: first, 20% to savings and investments, then 50% to everyday needs, and 30% to discretionary purchases.

Contained within that formula is one of the simplest personal finance plans. Pay yourself first (investments), spend no more than half your income on living expenses (rent, groceries, clothes), and leave the rest for luxuries (movies or travel).

Estimate your expenses

Before you can plan your budget, you'll need to estimate all your expenses. Consult your phone banking app or statements to track your spending and itemize each expense in a notebook or spreadsheet. Factor in:

  • Finance payments or rent, property taxes, clothes, groceries, and so on
  • Periodic costs such as school fees, car registration, and annual vacations
  • Festive periods, such as Ramadan
  • A buffer for unexpected expenses

Total up your income

Then add together your income from all sources. Think about:

  • Salary
  • Business income
  • Dividend and investment income
  • Property rents

List your financial goals

Consider your personal goals and estimate their cost. If you want to buy a home, what would the down payment for home finance be? Consider saving for retirement, paying for your children's education, building an emergency fund, saving for a wedding, and so on. Put a number to each item; for example, "AED500,000 for the down payment on home finance".

Separately, add up your savings or investments. Enter those already allocated towards specific goals under the appropriate heading. Calculate how much more you need.

Then work backwards from each target. If you want that AED500,000 in five years, you will need to set aside AED8,333 per month. Consult ADIB's helpful planners for savings and retirement or home finance to make the process easier.

Set up recurring payments

Assuming you have enough income to allocate across all three categories, set up direct debits with your bank for both the recurring expenses and your investment allocations (if necessary, in a savings account before you finalize an investment plan). When the money goes to work before you see it, you're unlikely to spend it.

If your income doesn't cover your lifestyle, see where you can adjust.

Check in regularly

There's no point in having a budget if you don't stick to it. Set aside half an hour every week to look at whether you're on track or not. You will need to adapt as life throws up changes, but at least you'll be well prepared.

By planning your finances, you can reduce tension around money, avoid spending what you don't have, and secure those long-term goals.