I am stuck in a constant cycle of minor debt that I cannot ease myself out of. My wife and I have good jobs in the real estate industry and earn about Dh80,000 between us. This pays for an apartment in Jumeirah Lake Towers, school and nursery fees for two kids and two cars. Yet we have this niggling credit card debt of Dh80,000 that we can never seem to shift. Dh40,000 of the debt is here on credit cards - we have one each - and the other Dh40,000 is on a credit card in the UK, where we are from. We also have savings but we don't want to dip into those to pay off the debts as it seems like a step backwards and with a very young family, we are desperate to have some savings backing us up. At the same time the debts, though fairly small, stress us out as they are there all the time. We try to pay off a chunk every month but the something comes up and we are back to square one. Is a short-term loan the solution? Our worry is that if we do that, we will then run up the credit card debt again as UAE life is constantly full of unexpected expenses. We have been in Dubai for four years and also save Dh10,000 a month and don't want to stop doing that. What is your best advice to help us get rid of this niggling debt once and for all? JG, Dubai
Debt panellist 1: Kunal Malani, head of customer value management, UAE and Mena at HSBC Middle East
Your issue is a very common one, unfortunately, and I think you should consider taking out an Dh80,000 personal loan to help you pay off both credit cards. This loan will help in two ways. Firstly, it will become a committed payment of a fixed amount every month and you could even set it up as a direct debit from your salary account.
Secondly, interest rates on personal loans tend to be much lower than annual percentage rates, or APRs, on credit cards so your payments will go towards reducing your debt and not just towards paying interest.
If you take a loan for Dh80,000 and pay off both your cards, you will pay approximately Dh2,500 a month over 36 months or Dh3,500 a month for 24 months depending on the interest rates applied. This could affect your desire to save Dh10,000 a month but it’s only a small part of your monthly savings and it will clear all of your credit card debt, not to mention give you peace of mind.
Moreover, based on the facts you have shared, you seem to have a healthy level of income. If we were to make the following assumptions on your stated monthly expenses (roughly Dh20,000 in rent, Dh10,000 in school, Dh8,000 in cars and Dh15,000 in household, utilities and entertainment) you should be left with around Dh25,000 in discretionary income. I think if you streamline your finances and plan better, you may be able to save more than the Dh10,000.
Now on to your other issue of running up the debt again. If that’s a concern I suggest you reach out to your bank to reduce your credit limit to an amount that is enough to cover your day-to-day needs. I also suggest you ask your bank to set up a standing instruction to pay your new monthly card bills in full every month.
Building financial discipline is hard and temptations abound. All the more reason why we must be more vigilant about our finances and pay off our bills on time.
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Debt panellist 2: Rasheda Khatun Khan, a wealth and wellness planner
So many people suffer from this issue but most of the time it comes down to budgeting and not allocating the right amounts to the right expenses. This certainly sounds like the root cause here.
Unexpected expenses are inevitable and in fact should be expected. I'm sure you've heard yourself say: "everything has come all at once"? Again these types of expenses always do. You need to allocate your income effectively and build a cash flow system for your household; this is key to not only staying out of debt but also constructing a solid financial plan for your future.
First things first, establish what your true expenses are. You can use this link to download a free income and expenses planner. What's important here is that you allocate money for those irregular and adhoc expenses. For example let's take travel, which is usually the number one culprit for credit card debt. Have a separate travel pot and put money into it monthly. So, in this example, you would work out expected travel over 12 months and divide it by 12 to give you the monthly amount you need to be putting away. Do the same with rent and school fees. Divide the annual cost into 12 months and start putting it into a separate bank account. Don't be afraid to open several bank account to help you get organised. Consider it as your financial filling cabinet.
Other expenses to budget for are gifts and occasions and also miscellaneous expenses. In your miscellaneous pot, I recommend you build up to a month's salary. Use this pot for the 'unexpected' costs so that you are ready for them. Whenever you take money out, build it back up again over the following months.
Also, consider using some of your savings to pay off as much debt as you can. The interest rate charged on credit cards can be around 40 per cent per year. This means your savings should be making more than this to make it a better deal. So unless you are making more than what your credit card is charging you in interest, I suggest you repay some debt. As a young family you are certainly right in ensuring you have some cash available, so do keep some of those funds.
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Debt panellist 3: Keren Bobker, an independent financial adviser with Holborn Assets
Compared to many situations we see, the level of debt in this case is not at all bad. But when someone is stuck in a rut and they don’t feel as if they are moving forward in life, it can be hard to see a way out. This is where a little objective advice can make a difference.
Clearly, JG and his wife have a good level of income, and they should be able to pay off this level of debt over a fairly short period of time. While converting the credit card debt to a personal loan, which would have a lower rate of interest, is an option there is always the danger that they will build up further debts on their cards and be back in the same situation.
They say that they have some savings, so assuming at least part of this is in cash, they have money set aside for unseen events and this one of the first pieces of advice that I give anyone. They should then only need their cards for real emergencies. The cards themselves should remain at their home, in an envelope at the back of a drawer, and not carried around so as to avoid the temptation of using them.
I suspect that the credit card debts are not reducing as they are paying no more than the minimum amount each month. This means that they are only paying interest, at no doubt a high rate, so the total outstanding will not reduce. They need to pay more than the minimum each month to reduce the debt.
Sit down and draw up a proper budget. They need to consider not just their usual monthly outgoings but to factor in annual or less regular outgoings. Cars need repairs on an ad-hoc basis, electrical goods break down etc, so factor that in too. If they keep a record of all outgoings, down to the last dirham, for a month or so, they will then see where their money is going and where savings can be made. We can all cut back on our expenditure, with some simple steps such as economising on our groceries, going to a cheaper supermarket, skipping a couple of takeaway coffees, or cooking at home instead of going out.
With the level of stated income, they should be able to save significant amounts but it can take a fresh mindset and some constant discipline to do so. Good habits can be learned at any stage in life and having a sensible budget and spending wisely, refusing to ‘keep up with the Jones’s’, and instead focusing on paying off debts as an absolute priority not only improves a financial situation but can make the difference between a life where you are stressed and worrying, and a much happier one.
On this panel this week: Kunal Malani, head of customer value management, UAE and Mena at HSBC Middle East; Keren Bobker, an independent financial adviser with Holborn Assets and Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life
The Debt Panel is a weekly online column to help readers tackle their debts more effectively. If you have a question for the panel, write to firstname.lastname@example.org.