How much should you save every month?

Last year during a conversation over coffee, a friend mentioned her plan to buy a new SUV. We went to the showroom together, took a test drive, and sat with the executive to know money details. The down payment required was about Dh40,000, and the rest could be furnished with a car loan.
Ideally, this should have been a planned decision, and money for the down payment should have come from the savings' kitty. But my friend chose to apply for a personal loan and a car loan to fulfil the new cherished dream - which was a mistake. In total, the cumulative outgo for a month for that car would have been over Dh4,500.
"My idea is to live in the moment," she gleefully said on the acquisition of her new ride. Sadly, her expenses made on the spur-of-the-moment have since increased and she is now caught in a quagmire of debt with loans, credit card payments, and other fixed expenses running in five digits  every month.
Even though personal finance is a cornerstone to all financial decisions we make in life, it is one of the most underestimated ones. Lack of planning, clarity of thought and mindless spending have pushed way too many expatriates to the brink of collapse. Many even choose to flee the country, without exploring debt restructuring possibilities and or adhering to austerity measures. Saving and generating wealth, however, are simpler than it seems.

50/20/30 budget rule

Although there is no 'one size fits all' solution, budgeting and a wee bit of financial discipline go a long way in creating a comfortable financial cushion. Take the popular 50/20/30 budget rule, for instance. It can be a good start for those who plan to start their journey to financial well-being and put their house in order.
As per rule, the first 50 per cent of your income should be allocated to necessities or running expenses. Broadly speaking, these include rent, groceries, utilities, transport, clothing, etc. - i.e. daily living requirements.
The next 20 per cent should fund your long-term financial savings and extra payments. The onus lies with earners to create safety nets and plan for big expenses in the future. Ideally, we should be investing a part of this 20 per cent into a retirement fund, and spending some on insurance to cover both life and health. This 20 per cent bucket should also allow for other long-term expenses such as down payment for a house, car, debt repayments, like the ones on a car, personal or home loans.
Banks in the UAE, such as the Union National Bank and Noor Bank, offer savings and special accounts that allow segregation of savings. You can make pockets, or assign different goals to different accounts to save for your long-term needs. National Bonds is also a good alternative for long-term savings needs. The company offers different plans that allow you to remain financially committed and earn an extra income through profit sharing.
The third and the last bucket with 30 per cent of your income can be used purely for lifestyle expenses. You can fund your annual vacations from this lot, or pay for gym memberships, buy accessories for your pet, brunch, mobile phone plans, cable TV connections, networking, etc.
Basically, this rule suggests allocating half of your salary for the necessities; the rest 20 per cent on long-term savings and debt payments; and the remaining on lifestyle choices, networking and non-necessities.

Financial freedom

For starters, the above plan can act as a guiding light and allow you to live and plan your expenses comfortably.
However, there is more to financial freedom than just adhering to numbers. Financial freedom allows you to experience the power of compounding and realise that simple trade-offs can generate a lot of wealth and take your worries away.

So how can that be done?

Stick to your budget: This is the cornerstone of all money-management strategies. A simple way to keep a tab on money is to write down all expenses, or better still, make use of personal finance applications that keep track of your spending. Once you have clarity on where you are spending, you will be able to control unnecessary splurges.

Hunt for high-earning accounts: Long-term savings and investments can be propped up with high-earning accounts, such as mutual funds, direct exposure to equities, and more. Banks usually offer guidance on such account types.

Learn to differentiate between want and need: Consumer base in the UAE is usually running on steroids, courtesy of the amazing deals and discounts that run throughout the better part of the year. We understand that differentiating between need and want might be hard to come by. One rule of thumb while shopping is to go with a list of items to purchase, and if your heart is set on anything off the list, think over it for at least a week before dishing out your plastic card and making the purchase.

Read, read, read: Reading and talking about issues (here we specifically mean money matters) generates ideas, keeps you focused, and increases knowledge and awareness. Look for blogs and articles on personal finance that will allow you to get creative with money, and find better avenues for saving and investing.

At the end of the day, it is all about your relationship with money. And trust us, if you are committed to it, it will prosper as you grow and allow you the financial freedom before 65 - the age for official retirement in the UAE.

-suneeti@khaleejtimes.com