Most people I come across as a Financial Advisor in Dubai live paycheck to paycheck. It is alarmingly true for even the most highly paid executives in this region. As per a study, 50% of Americans live paycheck to paycheck and if there were reliable statistics available the same would be true across the world. The harsh reality is that most of these are not living paycheck to paycheck because they earn less but because they do not know how to manage their finances.
However, with a little bit of effort you can easily get off this hampster wheel and take control., All you need is a little effort, some will power and overall discipline.. You can also take help from a qualified financial advisor in Dubai to understand where you are going wrong and work with them to overcome the obstacles. There are multiple benefits of holistic financial planning, and if you are not doing it as of now, it is time to start doing it.
The problem and the reason for it
You are in this situation because your expenses consume most of your earnings, and hence you are never able to save and invest.
Why is this happening even though you have substantial income? If you look at your large expenses over the last few months you will notice that most of them are not for essentials or needs but for things you wanted but probably never needed. We are all guilty of buying things we don’t need.
You need to become self aware, and understand what are the things you actually want, versus what you want because someone else has it. You need to indulge every now and then, but within limits it won’t lead to a stressful financial situation in the long run.
Most people do not want to do anything about it because, “If it’s not broken, why fix it” attitude.
The problem with this is that once something breaks, it is probably too late to fix it.
Ways to break the cycle
Now that you understand why you must break the cycle, you must be eager to know how you can do it. The good news is that it is not rocket science, and you can do it on your own. If you need external help, you can always consult a financial advisor in the UAE.
Track your spending: All the people who live paycheck to paycheck have one thing in common. They are unsure where the money was spent at the end of the month. Hence, the starting solution to the problem is to track your spending.
Open your last six months’ statement and track your expenses to get an idea of your spending habits. You do not have to do anything – you only have to find the habit. For example, you can try to break down your expenses as 40% household expenses, 20% food, 35% entertainment, and 5% travel. With this, you have done half the job. The next thing is to mark the spending as essential and non-essential or as Wants and Needs.
Create a budget: Knowing the expenses won’t help you break a cycle – you need a plan for it. The first step in the planning is to create a budget. The budget aims to reduce your expenses and get your finances under control.
The first step in budgeting is to know your net income (your total salary + any other income). Next, subtract the items under the Needs category from the first step. It will include your housing payments, phone bills, food, and travel.
The remaining amount is your discretionary income. You have to divide this amount between your needs and savings. There is no rule to define how much you should spend on your needs and how much to save. However, as a starting point, you can follow the 50/30/20 rule. As per this rule, you should spend 50% on your needs, 30% on your wants, and 20% should go to savings. Depending on your life situation, the last two category percent can change. You have limited scope to reduce your needs.
Cost-cutting: We are now at the most crucial step to breaking the cycle. Once the budgeting is over, you need to find ways to cut costs. You can cut costs from both buckets – needs and wants. Below are some areas to consider for cost-cutting:
1. Monthly bills: You may be paying a high energy bill because you are not in the habit of saving electricity. Can you work on it? Similarly, look at the other bills, and see if you can reduce those bills.
2. Food bills: Most of us like to eat out, and there is no harm if you want to enjoy your weekend evening with your loved ones over a nice dinner. However, you do not have to visit the fanciest restaurant every time you go out. Also, if you are going out too frequently, you can try to reduce the count. Having food at home can significantly lower your food bills and significantly improve your health.
3. Shopping and entertainment: You can do away with needless expenses in this category the most – you can lower your shopping frequency or the number of subscriptions or movies you watch in cinemas. You do not have to reduce the number to zero – you only have to reduce the numbers.
Automate your savings: Once you have done the cost-cutting, you will start seeing the money in your savings account at the end of the month. In a few months, you will know how much you are saving on average. However, there is always a risk that you may use the money for shopping, vacation, etc. Hence, it is essential to automate your savings. One of the things you could do is transfer the money to a different account at the start of the month.
Enjoy present but also secure future
With the above steps, you can easily break the cycle of living paycheck to paycheck. Not only this, but if you can make the right investment decisions (on your own or with a financial advisor’s in Dubai help), you can create wealth.
You should continue to spend on things you love to do but at the same time work towards securing the future. As mentioned at the start, life can throw some unexpected turns, and hence the first thing you should do is prepare for them by creating emergency funds. Next, you can invest the saved money to get good returns and secure your future. If you need investment advice in Dubai or anywhere else, you can reach out to me with your concerns, and I’ll be happy to help.