Help! My living costs are more than I earn

Help! My living costs are more than I earn
12 April 2012

FILIPINO Ann Jensen dreams of owning her own home, but is saddle with a lot of unsecured debt in the form of credit cards and loans.

The 30-year-old drafted in cashy to give her a money makeover to try to get her on the right track to financial stability.

We asked Richard Taylor, a chartered financial planner at Acuma Wealth Management, to give her some sage advice. Here’s what Ann told us about her personal situation, and Richard’s advice:

Ann says...

I moved in UAE in 2008. I was sponsored by an employment visa from my former company in Dubai. I worked for it for three years as a customer service agent and am now working for another company as a logistics executive.

My financial goal is for me to own a house, but I’m stuck with a lot of debt in credit cards and loans.

I have a Citibank loan with an interest rate of 13% per year, a Dunia loan at 8% a year and credit cards from FGB, Emirates Bank, RAK Bank and Citibank.

My annual income is AED 72,000 ($19,601), or AED 6,000 ($1,633) a month. My monthly living expenses are: AED 3,000 ($817) on my loan, AED 2,500 ($681) on my credit cards (if paying the minimum across four cards), AED 500 ($136) on food and AED 300 ($82) on transport – so total monthly expenses of AED 6,300 ($1,715). Some of these expenses are shouldered by my fiancé. My fiancé also pays our rent of AED 2,000 ($544) per month.

I was contributing to a pension scheme in the form of a dollar savings account in the Philippines, amounting to $520 a year, but I discontinued it due to a lack of funds because of my debts.

I’d like to be ready for any financial emergency so that I’m not dependant on anyone else’s financial help – perhaps building a fund of AED 1,000 ($272) – and be able to prepare for a brighter future for my family.

I’ve never been to a financial adviser. Can you help?

Richard says...

Without wanting to appear too negative, you are in a pretty bad situation. By my calculations your monthly outgoings are more than your monthly income and that’s allowing for only the most basic living expenses – debt repayment, food and transportation. This isn’t ‘living’ – it’s existing and only just at that. Without your fiancé you wouldn’t have a roof over your head.

As a result, there is no point me even starting to discuss your longer-term objectives. They simply do not matter at this time. All that matters now is that you reduce your debt and your monthly debt repayments. Only once you are debt free, or at least have some disposable income, can we look to start saving for your long-term objectives.

Ordinarily, I would start by saying you need to save for an emergency fund (the AED 1,000 you refer to), but given the fact that your monthly outgoings are larger than your income you clearly cannot start to do this.

I can only assume that your fiancé is making up the shortfall each month and, therefore, you will have to rely on him to provide you with an emergency fund should you require it.

So, how do you get out of debt? I’m not entirely sure what the answer is here because you are not in a position to overpay any of your debts and start reducing them and I am not aware of the help your fiancé can provide.

Assuming he can’t provide any further assistance, the only thing you can do is to try to reduce your monthly debt repayments. This will both free up some income for you to live on and, just as importantly, allow you to start repaying your debts by overpaying when possible.

The first priority is to stop spending on you credit cards assuming this is what you are doing. Cut them up – now! The second priority is to apply for a loan to consolidate all four of your outstanding credit card debts. If you can get one, this should significantly reduce your monthly payments whilst actually reducing your debt because it is likely that the interest payment on a personal loan will be significantly lower than that on your credit cards.

After that you need to try and move your Citibank loan; 13% on a personal loan sounds awfully high and you should be able to get a much, much better rate, although do bear in mind that there is a lot I don’t know here, such as your credit rating.

In summary, getting out of debt is the only thing to focus on right now – everything else needs to wait. Step one of getting out of debt is to stop adding to your current debt pile. Next is to consolidate as much debt as possible with a loan on as low an interest rate as possible. Third step is to pay as much of as you can as quickly as possible. Just as people find that debt snowballs without them realising it, the reverse is true when paying it off. Don’t wait until you can pay it all off, just pay of what you can as regularly as you can.

In case you can’t do any of these things (say you have a poor credit rating), there is a school of thought that says pay off your smallest debts first, regardless of the interest rate differences. This thinking goes that as you pay off small debts and experience the psychological boost, you are more motivated to tackle the next debt and, therefore, more likely to succeed. Good luck!

Have you been in a similar position to Ann? What’s your advice to her?

Comments

  • mahmoud
    mahmoud
    2012-04-15T11:34:48

    Reminds me of a saying "I am living so far beyind my means, we could be said to be living apart"

  • Colin
    Colin
    2012-07-16T22:01:07

    Rolling Stone magazine has a fascinating and heart bleeding article which shows how America's middle class have been forced to sell up their homes and are living out of their cars as a result of low savings and then the recession.  It shows the crucial importance of emergency savings... the article is here

  • jb202061
    jb202061
    2012-09-28T20:25:41

    maybe you can go for bedspace that will cost only 800AED (or even less).. this is not a very good suggestion but i dont think you have much of a choice.... that way you can have some more money to reduce your debts. Good Luck!

     

  • Nadeem
    Nadeem
    2012-12-12T09:27:53

    Do not spend much for couple of months, release your debt and pay off credit cards, and from next time dont even think you have credit cards existence with you...

  • bermuda97
    bermuda97
    2013-02-26T15:54:48

    What has happened since the article. I think to some extent the story reflects the idea that Dubai is paved with gold. The reality is that all cities are like this and I am sure your story is not the only one. I hope the cards have gone, you are taking advantage of free exercise like walking even in the heat and getting your life together.

  • nima
    nima
    2013-03-06T20:15:39

    you are so right bermuda97 - re your comments. As for what happened, we'll be following up with various people and posting updates! 

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