How to strike the right balance between spending and saving

To spend or to save? This is a recurring question in our eternal struggle with managing our personal finances. And this is because both spending and saving are dynamic financial habits, shifting over time according to your wants, needs and preferences.

A recent survey from Visa and Al Etihad Credit Bureau (AECB) on UAE residents’ saving habits found 92 per cent of respondents are saving money, while 59 per cent are happy with the amount they have stashed away. However, only 23 per cent felt ‘very confident’ about their financial future. So, how can you feel more confident about your savings and long-term financial security? Here are a few tactics to help you understand where to spend and where to save:

Create a budget

Examining your income and expenditures will determine exactly how much money you have coming in and where you’re spending it. Once you've got a clear understanding of what income you’re receiving and what expenses you’re responsible for, examine how you could save more. Many beginners track every transaction for two weeks to one month before creating a budget. It's a good starting point if you've never tracked your spending before and by using electronic payments that track your transactions automatically you can easily review transactions and understand where you’re spending.

Identify wants versus needs

To streamline a budget, identify your discretionary spending (wants) versus your essential spending (needs). Recognising the difference between these can help you better understand what spending is necessary and what categories you could possible save in. The idea isn’t to stop enjoying your life but to understand costs and prioritise purchases based on need.

Tackle your debt

The Visa-AECB survey shows that loans are an important source of financing for UAE residents for big-ticket purchases, such as a car or home. When you have debt to manage, it is essential to be even more disciplined with your spending habits to ensure you make your monthly payments on time. Also, review your AECB credit report to fully understand your debt levels.

Establish a clear savings goal

According to American financial planner Michael Kitces, “functionally most people don’t ’choose’ what to save per se … they choose what to spend, and then save the limited dollars that may or may not be left over after covering fixed/essential expenses and any discretionary spending”. Having an end goal in sight will help when it comes to setting aside a specific amount every month or year to reach that target. To kick-start your savings, consider automating your accounts to transfer the budgeted amount to your savings each month.

Choose the right savings method

This depends on a few factors including: determining how much money you plan to save, how accessible you need the funds to be, and when you’ll want to withdraw them. It can be daunting to evaluate the complex options available but if you learn more about each saving vehicle it will be easier to get started.

Set up an emergency fund

As much as we prepare ourselves for life’s events, the unexpected can happen. This could be in the form of a medical emergency or home/car/gadget repairs. Any one of these unplanned expenses could impact your budget. The Visa-AECB survey reveals that singles, those in the lower-income bracket and those aged 16-35, feel less financially equipped for major life events. This is where an emergency fund comes handy. Experts say it’s smart to build and maintain an emergency fund with three to six months’ worth of living expenses. To build the fund, set some money aside every month, no matter how small the amount.

There’s so much in your future you have no control over — putting aside some money to spend when you really need it will help you take control of your future and financial affairs.

Shahebaz Khan is Visa’s general manager for the UAE and Daniele Lavalle is the head of business development at Al Etihad Credit Bureau