If you have been planning to open a savings account this year, but struggle with creating a proper budget for yourself, try out the 50/30/20 savings rule, as recommended by UAE personal finance experts.
This savings rule, was first popularised by Elizabeth Warren – a former Harvard Law professor – and her daughter, Amelia Warren Tyagi, in their 2006 book All Your Worth: The Ultimate Lifetime Money Plan.
Applicable to almost all income groups, this savings rule follows a 3-step strategy:
- 50 percent of your income for needs
- 30 percent of your income for wants
- 20 percent of your income for savings
Since UAE workers have the advantage of working on a tax-free salary, implementing this rule would help in higher savings over time.
“This rule isn’t just a budgeting formula; it’s all about balancing life’s necessities, pleasures, and future security. In the UAE, where lifestyle temptations never stop, it’s crucial to embrace this rule (or similar) not as a constraint but as a guide to mindful spending and saving. For example, considering the high cost of living in Dubai or Abu Dhabi etc., allocating 50 percent to essentials might mean making smarter housing choices or opting for more cost-effective transportation,” Mike Coady, a financial advisor in the UAE with over 25 years’ experience in the financial industry told Arabian Business.
Coady also stressed on the importance of saving in the UAE as an expat, as this helps in tracking one’s current financial situation, as well as their future financial needs.
“Effective budgeting requires more than just tracking expenses; it involves forecasting future financial needs and goals. This foresight allows you to adjust your spending and saving habits accordingly. Knowing your numbers – your income, fixed costs, variable expenses, and financial commitments – is critical. It empowers you to make informed decisions, anticipate challenges, and adjust your financial plan proactively to stay on track with your goals,” Coady explained.
Keeping aside 50 percent of your UAE salary for needs
Arabian Business also reached out to personal finance expert Carol Glynn who explained what ‘needs’ really mean in this rule.
“Essential expenses or ‘needs; are those expenses which we cannot avoid or things that we would really struggle to live successfully without,” Glynn said, adding that the 50 percent will all your monthly expenses such as housing, groceries, fuel, internet costs, mobile phones, car insurance, maintenance and electricity.
“In the UAE, where housing costs can be high, and are increasing at the moment, it becomes crucial to carefully manage this portion to avoid overwhelming your budget. Also in the UAE, where the schooling system is largely private, school fees can form part of this needs section,” she explained, adding that is also important to review expenses for the past six months and classify each cost as a need or want.
“This will then give you a list of all your essential costs and also your non-essential costs.”
Allotting 30 percent of your income to your wants
Non-essential items can be categorised as ‘wants’.
For example, while groceries are essential, dining out at upscale restaurants or buying expensive cuts of meat for dinner would be considered luxuries and fall under the ‘wants’ category.
Similarly, entertainment expenses like streaming services, movies, and sporting events, as well as hobbies and vacations, would also be classified as ‘wants’.
However, according to Coady, given the UAE’s abundancy, sticking to 30 percent allotment of your salary to ‘wants’ “can be challenging.”
“It’s about prioritising experiences and purchases that offer real value. For instance, dining out at restaurants is a popular pastime but choosing to dine out less frequently can be both financially rewarding.
“For the 30 percent discretionary spending category, it’s crucial to establish a clear budget and adhere to it. This means making tough choices about what you can and cannot afford, distinguishing between wants and needs. It’s not about living as if you’re on holiday; it’s about responsible financial management. Exceeding this budget not only impedes your ability to save but can also lead to potential debt. Sticking to your budget requires discipline and a long-term view of your financial goals. Regularly going over budget can have serious consequences, jeopardising your savings plans and overall financial health,” Coady said.
When asked what other challenges are included under this savings rule method, Coady said it includes “high cost of living, coupled with a lifestyle that often includes luxury spending and socialising, can make sticking to the rule more challenging,” he said.
Coady also explained that the diverse UAE expat community has different financial obligations, such as sending money back to their home countries, which makes it challenging to apply the traditional 50/30/20 budgeting rule.
To adapt this rule in the UAE, it is necessary to have a deeper understanding of each individual’s circumstances and potentially customise the percentages to better suit the unique expenses and lifestyle choices that are common in the region.
“From my experience, the assumption that individuals with higher incomes will save a larger percentage of their earnings doesn’t always hold true, especially in a high-cost living environment like Dubai.
“Often, it’s the lower-income earners who manage their budgets more effectively, displaying a greater ability to control spending and save a higher percentage of their income. Conversely, higher earners, despite their substantial incomes, face ‘lifestyle creep’ — their increased earnings are absorbed by homes, luxury cars, designer clothes, superior schooling, and holidays, leaving less room for savings. This highlights the importance of disciplined financial planning and budgeting across all income levels,” Coady said.
Echoing the sentiment, Glynn said that the UAE’s rent prices, an abundance of entertainment options and the allure of luxury spending and living could pose challenges to the savings rule.
“Balancing social connections and entertainment costs, particularly for expatriates seeking connection and the creation of friendships, requires conscious decision-making. Awareness of these challenges helps in making informed financial choices,” she said.
Glynn said that travel expenses are also a factor to consider for individuals in the UAE, which may not be as relevant for their friends and family back home, and that those living in the UAE often spend more on traveling to their home countries than they would if they were residing in their home countries.
Saving 20 percent of your salary in a high-cost living environment like the UAE
According to Glynn, saving 20 percent of your income is a “fundamental aspect of financial well-being,” however, she advised that it’s essential to have a clear purpose for your savings, such as retirement investments, paying off debt, or saving for education.
Many people struggle to save despite having a good income and seemingly modest lifestyles because they lack financial clarity, Glynn explained, adding that tracking past spending is important because our brains can’t remember every expense, and there are often hidden or subconscious expenses we’re not aware of.
“The purpose is to understand and gain clarity. We look to see if there are things you’re paying for that you didn’t realise? Are they expenses adding up to more than the person was aware of? A common example is dining out. I had an example where a family assured me they spent a maximum AED2,000 per month on dining out. When we looked at their expenses, they were spending, on average, AED6,000 per month. They were shocked because in their mind when they thought about dining out they forgot the breakfasts, quick lunches, coffees with friends. This is the benefit to reviewing how it all adds up and then deciding if you want to continue with that or not,” she said.
By reviewing past expenditures without judgment, one can gain clarity and identify areas where they may be overspending, Glynn added highlighting that UAE travel expenses “hit savings accounts and credit cards the hardest every year.”
She also advises earning residents in the UAE, to take advantage of the many opportunities for discounts and savings, such as dining offers, credit card discounts, and loyalty programs.
“Saving in a high-cost environment like the UAE requires this intentionality and clarity about your lifestyle and spending habits, plus taking full advantage of the many ways to do what you want to do but it costs less due to smart usage of loyalty programs and discounts. Regularly analysing expenditure, negotiating costs and setting clear, values based goals contribute to successful savings. Setting yourself realistic, values based financial goals is key. Having a purpose for your savings that is important to you is the best way to ensure you stick to those goals when times get tough or temptation to spend arises. Having a reason to say no makes it so much easier,” she said.
Following the 50/30/20 rule effectively in the UAE
To effectively monitor expenses and adhere to the 50/30/20 rule, there are practical steps individuals can take, according to Coady.
One approach is to create a basic spreadsheet to manually record and categorize expenses according to the budget. This involves setting up columns for each budget category (essentials, wants, savings) and tracking spending in relation to each category.
Alternatively, there are budgeting apps available that offer automated solutions. These apps can be linked to bank accounts, categorise transactions automatically, and provide visualisations of spending patterns. Regular financial reviews, conducted monthly or quarterly, can also help individuals stay on track and make necessary adjustments to their budgets.
In terms of specific saving or investment options in the UAE that align with the 50/30/20 rule, Coady said: “A cash deposit account offers easy access but typically yields lower returns over time. For medium-term goals like saving for a home deposit, consider slightly higher return options, which offer better potential growth. For long-term objectives like retirement or education planning, you might explore diversified portfolios. Each of these choices should align with the amount of risk you’re comfortable with and the time frame of your financial goals. Remember, it’s not just about saving but also about how effectively your savings are growing.”
Can it be applied to those earning AED4,000 per month as well as those earning AED40,000 per month?
The 50/30/20 approach can be applied universally regardless of income levels, and its effectiveness depends on how individuals manage and allocate their money, according to Glynn, as this savings rule serves as a benchmark to help individuals become aware of their spending habits and guide their financial decisions. People tend to find comfort in benchmarks and enjoy comparing themselves to others to gauge their progress.
It may seem logical that higher earners have more opportunities to save beyond the 20 percent mark. However, this is not always the case, Glynn said.
“For example, for someone with an income of AED40,000 per month but has four children’s school fees to manage plus needs to accommodate a family of 6, then achieving more than 20 percent could be more difficult to achieve when compared to someone who earns AED4,000 per month but is single and has their accommodation provided for them.
“This is not about how much you earn. It’s about what you’re doing with what you earn,” Glynn said.
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