Help me become debt free!

Help me become debt free!
07 June 2011

ONE cashy community member – like many of us – wants to stop overspending and learn to live within her financial capabilities.

The 40-year-old, who is single and doesn’t have children, and prefers to remain anonymous, has a successful career in public relations and corporate communications. She moved to Dubai in 2003.

cashy has given her a money makeover with the help of Tim Searle at Globaleye, the independent financial adviser. Here’s what they both had to say:

Our money makeover candidate says…

My aim is to become debt free by the end of 2011. My overspending is my biggest concern. I earn AED 535,000 ($145,796). Every month, I spend AED 14,000 ($3,811) on living expenses, AED 2,000 ($544) on holidays, AED 7,000 ($1,906) on repaying a personal bank loan with HSBC (which has an interest rate of 6.5%) and AED 2,445 ($666) on my car loan with Emirates NBD (which has an interest rate of 5.5%).

I also have credit card debts of around AED 10,000 ($2,722) and a personal family loan of AED 8,000 ($2,178), which ends in two months’ time.

I put AED 7,000 a month into my pension. I’d ideally like to retire at age 65. I’d describe my attitude to investment risk as ‘low’. If the choice were between accepting a greater degree of investment risk and forgoing some of my goals, I’d opt to give up some goals, so I really am pretty risk averse. I’d love to have $10,000 in spare cash for emergencies.

I’ve never been to a financial adviser for advice. I don’t expect to receive anything in the way of inheritance, and I don’t have a will as I’m Muslim.

Tim says…

From your answers it seems that you’re an independent and creative professional who wants to make sure you’re free of debt and sitting on some savings as soon as possible to push your career and to realise your creative goals.

First things first! It’s great that you’re investing for your retirement, that you aim to become debt free by the end of this year and that your outgoings, on paper, are less than your earnings.

Your spending addiction and credit card debts are cause for concern, though. Let me focus first on credit cards. If I had to have a mission it would be to deter anyone from having credit cards, particularly when Visa debit cards are now fully functional.

However, I do understand they are useful for car rental and securing hotel rooms. That said, with the average annual percentage rate on credits cards in the UAE being 36%, they are a very expensive convenience.

From my calculations, you have incomings of AED 44,583 per month ($12,138) and total outgoings of AED 41,445 ($11,286) for the next two months, after which your outgoings reduce to AED 33,445 ($9,105). This gives you the opportunity to pay off all your credit card debt much faster and I recommend that you use AED 5,000 ($1,361) of your new surplus for this purpose.

Cut up all but one of your credit cards (choose the one with the lowest APR, not the one with the most air miles!).

Now let’s look at your spending behaviour. Like many of us in the UAE, you seem to be very good at spending and I’d recommend you implement a simple yet very effective tool to change your buying habits – the ‘traffic light mindset’.

The red light means ‘stop’. So stop before you impulse buy. The amber light means ‘think’. Do you really need the item or service? Can you afford to buy it without a credit card? If the answer to this is ‘no’, you can’t afford it.

The green light means ‘go’ – if you decide you need the item and can afford it. If you think you need it, but can’t afford to buy it, then go away and save for it.

Onto your pension now, and you’re saving about 15% of your salary, which is about right. You could look to increase this slightly each year though as your salary rises to keep track of inflation. Ensure that you review your investments regularly with you financial adviser and consider assigning your fund management to a qualified fund manager.

Remember that most, if not all, financial advisers are financial planners not fund managers. The right fund manager can make an immediate difference to your investments and your future retirement.

Your desire to have a cash reserve is a good one. It is important for everyone, especially expatriates, to have an emergency reserve to cover unexpected events, such as medical expenses, emergencies at home, flights and potential redundancy.

Paying off your debts should take priority, but after that open an offshore bank account and save regularly until you have around $12,000 stashed away.

Do you have any advice to add? Share with us below...

Pic credit: Grant Cochrane/ FreeDigitalPhotos.net

Comments

  • Colin
    Colin
    2012-04-23T18:37:48

    The Central Bank considered capping the APR at 18% but subsequently scrapped that -- so expect interest rates near the 36% level. Even at the lower APR (18% if you could get that) paying off an AED 7,345.00 ($2,000) credit card debt at the minimal monthly rate of AED 146.90 ($40) would take 146 months (12.2 years) and cost a whopping AED 14,186.87 ($3,863) interest (nearly double the original debt) according to the US government's federal reserve calculator. BUT by a nominal increase in the monthly payment to AED 367.25 ($100) the total debt will be paid off in 2 years instead of 12 and the interest will be AED 1,454.31 ($396) instead of AED 14,186.87 ($3,863).

    As Tim says, pay those credit card debts as quick as possible. The numbers should be a wake up call.

    Note rate of exchange used = 1 AED = 0.2723 USD

  • marwantamari
    marwantamari
    2012-04-24T00:09:43

     Thanks for a great  post. great advice from Tim. Aagree with the red , orange and geren light concept. 

    I also have credit card debt and put goal till end of this year to get rid of it. started paying with debit  card instead of credit cards so i know how much i deposited before traveling. . banks are no longer assisting you to grow but happy to be there when all is well and dandy but when they start loosing on one of their bad investments they turn around and put the squeeze . 

    Again thanks for sharing your great and insightful articles and tips on all matters of day to day fiannce and money mangment for the normal folk.... 

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