The 12 Steps – Steps 5 & 6 – Building A Foundation

Part of the challenge of saving money in Dubai (as highlighted in Don’t lose your dirhams in the sand. and Sandpit or Moneypit?) is that everyone around you seems to be living that ‘millionaire lifestyle’. Social media platforms like Instagram and Facebook help to perpetuate the myth that you are the only sucker not flying everywhere in a private jet with a pet cheetah roaming the aisle. Well I have a little secret to let you in on… most of it is all smoke and mirrors. How many of the Ferraris that you see on Dubai streets are owned outright do you think? How many are financed or rented?

Now, I’m not denying that there are high net worth and ultra high net worth individuals in Dubai… they are definitely here. But a lot of the ostentatious shows of wealth that you see on a daily basis are built on debt, or at the very least spending well beyond that person’s means. This is one of the biggest traps in our society. You are shown the lifestyle and the ‘things’ you should aspire to… then, you are offered ‘credit’ (which actually means debt) to help you get those things. Unfortunately, you are now paying a hefty amount of interest on top of the price of the original item. You repeat this over time and you are now further away than ever from REALLY achieving the lifestyle that you wanted. However, once you have accepted Step 1 of Dubai Money Guy’s 12 Steps: That more stuff does not equal greater happiness, you will be mentally prepared to forget keeping up with the Joneses and start ‘just doing you’.

Today’s post is about two steps that will dig you out of the debt trap and build a foundation to put you well on the path to financial serenity.

Step 5 – Tackle Debt – Highest Interest First

Anyone who read my interview in The National will know that I can speak about debt from some experience. After university I was in a very deep hole financially, and not really earning enough to dig my way out. Fortunately, I was able to consolidate a lot of debt into one loan to buy myself time and chip away, until ultimately my move to Dubai allowed me to free myself from those shackles permanently. It was a very challenging time with debt collectors chasing at my mum’s house and bills stacking up everywhere… but the first step to actually getting out of debt… is to stop getting into more debt. That’s why I have made this step five and it appears after creating accountability and stopping your unnecessary spending. BUT – If you do have outstanding debt, tackling it is a matter of extreme urgency. As long as you carry any debt at all, some of your money is working against you. When you become debt-free and start to save or invest your money, each tiny dirham starts to work for you, generating interest or returns and compounding over time to build your wealth. That means that the moment you reach parity and pay off your debt… your net worth will accelerate far quicker than it can with debt weighing you down.

In Step 4 you should have got a good grasp on figuring out your actual levels of debt to measure your net worth. The next step is to dig into the terms of your loans, mortgages and outstanding balances to figure out what interest you are paying on each of them. Generally speaking (unless you have serious problems with high-interest payday loans), credit and store card debt that is not paid off in full monthly will be the highest interest debt, car loans can also come in very high, especially if you didn’t shop around. You should also check the terms of any overdraft facility that your bank provides if you tend to overspend your balance at the end of the month. Once you have a list of your outstanding debts with their rate of interest, take to the internet… can you find a cheaper credit card (we’ll cover this more in a later post), a better mortgage rate, is there a bank account that better suits your balance or needs? Next, total up your monthly interest payments against the balance (sometimes this is different from the lender’s minimum required payment). The total of all of those payments is your ‘debt tax’. You’re going to have to find a way to pay that amount and a little bit more every month just to stay in the same place. Meet your payments every month and use whatever money you have left over to overpay on the highest interest debt that you have. This will reduce the principle on that debt and eventually… pay it off in full. Then repeat for the next highest interest debt on the list.

If you find that the total monthly interest payment it is more than you can actually manage… (and I don’t mean that you would find it difficult… I mean that it would be impossible to meet that amount with your income…) then we need to find another solution. One approach is to contact the lenders and explain the situation, try to negotiate a payment plan against your outstanding debt at a reduced rate. Beware though, it is not unheard of for lenders to panic and try to call in the loan. Check your terms and conditions first. Another approach is to find a lender who will consolidate your debts into one loan at a lower monthly payment than those that you have now. This is a tidy solution, but if you are in financial difficulty, it can be difficult to find someone willing to lend to you. Another option is to talk to family members, if you are lucky enough to have someone in a position to help. If they are willing to lend you any amount for a period of time to get your head above water… it could make a huge difference. Remember that even if you offer them some interest that is lower than the amount you are currently paying – you should be better off. It can be very awkward to approach this and always make sure that you clearly record the agreement with any agreed interest and a pre-agreed repayment date so that there can be no misunderstanding later on.

Once you have started to pay off your debt, set yourself a target each month and then try to exceed it. Until these debts are paid off, forget investing, forget holidays or treating yourself. At this point, nothing should give you greater joy than seeing that number coming down. Look at it as a countdown to the moment you can start supercharging your financial growth with POSITIVE INTEREST RATES!!!!!!

6. Ring-fence your ‘safety net’ first.

Once you have clawed your way out of debt, the next step is to build a rainy day fund. This is your war chest in case of illness, job loss, ceiling falling in, car finally giving up etc. etc. etc. The logic behind ring-fencing this amount rather than investing it, is that most investments that give you decent returns are not designed to give you instant access to your money. That’s because either they are fixed-term investments, or because the value of the investment can fluctuate, and you don’t want to have to withdraw money at the wrong time. Most people seem to agree that about 3 months salary is enough to hold back for emergencies. I think that’s a bit excessive in these days of terrible interest on savings. I generally keep about one to two months’ salary in cash savings.

It might take you a few months to complete steps 5 and 6… it might take ten years. Either way, the most important thing is to stay consistent and keep your eyes on the prize. Of course you will need to spend more occasionally and take the odd holiday. The important thing is that you track your progress and that the overall trend is moving you away from debt and on with the rest of your life. Once you’ve completed these two difficult steps, we can get started with the really FUN stuff!

Next blog: Steps 7 & 8 – ‘Set BIG Goals’ & ‘Invest: Pay Yourself First’

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