Most of us become expats for various reasons, but two of the most common are to experience a different culture and to have tax-free living in Abu Dhabi.
However, despite no longer having to pay taxes and generally having a higher income than back home, some expats may find that they haven’t really saved all that much money after their expatriate assignment is over. It is easy to get caught up in bling lifestyle and simply spending more because we have a bigger paycheque.
To ensure that you don’t fall into that trap, here are some basic budgeting tips.
1. Look into the crystal ball
Before plotting the driving route on a road trip, you need to know the destination, right? Even if you have not determined the exact hotel you will be staying at, you will at least have an idea of the city and general area within the city. Likewise, with financial planning, you need to have a rough idea of your long-term financial goals. It doesn’t have to be carved in stone as it will likely change with circumstances, but it is critical that you have some sense of what your financial needs will be in the future.
What would you need money for in the long term, say 5-10 years or more? Here are some examples:
• Parental care: Will your elderly parents require a nursing home or other medical care? What are the expected costs associated with that? Do they have sufficient funds to cover those needs or will you have to share the costs?
• University education for children: Will there be state-provided education for your children, government or bank loans available, or will you have to foot the entire bill for your children’s university education?
• Private school education: If your children are still young, elementary and high school fees will need to be planned for still. See point 2 below.
• Children’s weddings: Will your children be getting married in the next 5 to 10 years? Will you be paying for their weddings?
• Retirement: When do you expect to retire and where? Retiring in Thailand will be a lot cheaper than retiring in Switzerland, for example. Will there be government-provided health care or will you need to save for all your medical needs?
• Travel: Will you be travelling a lot upon retirement? If so, are your tastes 5-stars all the way or will you go budget?
Beside each goal, estimate a total figure about how much each would require and the anticipated amount of time you would have to save up for it. Then, determine how much you would need to save every month from now on for you to reach that amount. If you plan to put it in a simple savings account which provides 3% per year for instance, factor in the interest that will be earned as well.
If the numbers seem to be alarmingly large and you haven’t yet started saving for the future yet, don’t panic. This is why you are doing this exercise in the first place so let’s take a look at a snapshot of your current financial status to see how you can save for the future.
2. Take stock of your financial life
What are you currently spending your money on? Your day-to-day expenditures will likely include:
• Rent/Mortgage: Housing is the single biggest expense. Include any real estate agent fees (if applicable), maintenance fees (generally for apartments), and home insurance.
• Utilities: This would include water, electricity, air conditioning (if it is calculated separately), Internet/cable, housing fee (if applicable), landline and mobile phone.
• Private school tuition: Getting an education in Abu Dhabi isn’t cheap. See Abu Dhabi School Fees for an indication of school fees. Don’t forget to include the costs of admission tests, registration fees, sports or activity fees, class trips, and school buses.
• School supplies and uniforms: It is easy to forget about the costs of new pencils and uniforms, but over the course of a year, these can add up.
• Transportation: In addition to any car payments, add the costs of insurance, petrol, and maintenance. Being small cash expenses, taxi and any public transportation fares these tend to be more difficult to keep track of, but should be included as well.
• Insurance or other policies: There are generally monthly fees for life, health, critical illness or disability plans.
• Recurring debt repayment: If you have loans or any other debt, ensure you have a column designated just for paying back debt whether or not they are due monthly.
• Medical, dental, and related expenses: Your health plan may not be comprehensive enough to cover all your families’ medical or health needs. Track all medical, dental, chiropractor, or physiotherapy expenses. If you have a pet, be sure to create a separate column for vet and other pet expenses.
• Food: Keeping track of grocery bills or fancy restaurant meals may be easy enough, but it is trickier to remember to include the lunches at the food court or coffee and muffin runs.
• Household supplies and house help: Include the costs of cleaning supplies and toilet paper as well as the salaries of the nanny, gardener, and the pool boy.
• Newspaper and magazine subscriptions: Even if you don’t subscribe to newspapers or magazines, but buy them regularly, include the costs here.
• Apparel: Don’t forget the dry cleaning bills as well as new purchases of clothing and shoes.
• Vacations and Summer camp: A big part of the expatriate experience is going on vacations. Keep track of all your receipts from your trips and not just flight and hotel costs. Incidentals like buying bottled water, snacks, and souvenirs as well as tipping hotel and tour staff can add up.
• Entertainment: This would include movies, dinners out (if not tracked under food), trips to the water park and so forth.
• Personal grooming (haircuts, manicures, massages) and fitness classes: We all know how important the mani and pedis are so keep track of your spending and include any tips you give as well.
• Gifts and events: The many birthday parties that your children go to can add up so don’t forget to include them. Christmas and thank you gifts also go here in addition to the costs of any parties or dinners that you host.
3. Get on the paper trail
Calculate your costs by collecting every financial statement you can, including bank statements, investment accounts, utility bills, receipts and anything else that contains information about an expense.
Beside each category, enter the amount you spend every month. Make a guess next to any item that you are unsure about.
You may want to separate expenses into two categories: fixed and variable. Fixed expenses are those that don’t really change every month like mortgage or rent while variable expenses are those that fluctuate like gifts and entertainment. The variable expense category will be important for cutting down on spending.
Total up your monthly costs to see how much money you have left over for savings.
4. Put on your analysing hat
After taking a look at your spending habits, you may make some interesting and perhaps even shocking discoveries. Are you spending AED 200 a month just on lattés alone?
Don’t beat yourself up over it as the important thing is to learn from it and determine how to reduce unnecessary expenses.
Go through the list with your spouse and decide on the areas that you both think you can spend less on. Are those weekly pedicures really necessary or can you stretch them out to every two weeks?
5. Re-create to get a clean slate
With the revised target expenditures, create a new budget based on what you have decided that you could do without. Be realistic because if your new goals seem too overwhelming, chances are you won’t stick to it.
Use cash if that helps reduce your spending.
6. The budget is your future
If you were distressed at the amount required to meet your long-term goals, take action now to see if you can build up your retirement or children’s university fund.
There is no one rule for how much of one’s earnings should be saved as it differs largely on the salary and expense levels. Based on your earlier analyses, start setting goals for yourself to keep increasing the percentage of earnings saved (or used for debt repayment) so plan to save 20% of your earnings first and slowly start increasing the amount.
Aim to spend on essentials first, then savings, and finally, any left-over money can be spent on fun activities.
7. Re-visit and Repeat again
Re-visit and update your budget every three months to make sure you are staying on track. It will also be rewarding to see how much your efforts have borne fruit and to see where you can still improve.
Being financially savvy is a life-long commitment so repeat this process regularly especially after any significant changes in your life.