Choose a good Life over a Bad Debts

Do not fall into trap of credit cards "Mr. Graduate’s irrational ways of using credit cards and opting for loans lead him to pay 20-25% of his salary in clearing credit cards "

I feel that in academics, one of the subjects that should be included is – 'Threats of credit cards and personal loans’. I have been advising expat community in the UAE on the 'importance of financial planning’ for almost a decade. This is a general scenario in 6 out of 10 cases coming to the UAE. A small piece of advice could be of great help to young graduates who are planning to make their fortunes in the Gulf. Minor issues such as credit card and personal loan threats at an individual level lead to major issues such as subprime crisis.

Open the newspapers or log on to the sites of recruitment agencies–one thing that grabs the attention of a fresh graduate from a middle-class community is the opportunity to work in the Gulf. The job offers an average salary that is either on par with or more than what the graduate would make in India.

Mr Graduate, with big dreams and aspirations, was ready to relocate to the UAE for many reasons, mainly to improve his standard of living or to establish a platform to go to developed countries such as the UK or Australia or Canada, among others.

He worked for a multinational company and drew a decent salary.

His first year’s salary went into clearing debts and sending money back home to improve the standard of living of his family (parents). The moment his lifestyle was adjusted and tuned to the hot summer of the Gulf, the family back home compelled him to marry.

One thing that he could have done is started some regular savings habits.

Mr Graduate, after working in the UAE for one year, got married and decided to bring his family to the UAE. The moment his wife came, he was forced to go in for a studio or a one-bedroom flat after previously staying in a bachelor’s accommodation.

The rent of the flat was 30% of his annual salary. Now, he had to furnish the house and shell out a huge chunk of money from his pocket.

For a drowning man even a feather’s support was enough. Enter credit card companies that were ready to give him a credit limit of thrice his salary and thus instigate him to spend to the last penny of limits allocated, with a sales pitch of 'only’ 3% charge and loads of offers.

Mr Graduate, without understanding the consequences of spending beyond his capacity (3% monthly = 36% yearly) ended up paying almost 10-12% of his monthly salary in credit card bills. Because of the financial pressures, his wife started working and now two salaries were coming into the house.

In this situation, they should have paid off the credit card bills and enjoyed a debt-free life. But, the couple made a mistake. They increased their standard of living and the situation went from bad to worse.

To give him relief from huge credit card bills, a personal loan executive of the same bank offered a loan of up to one year of Mr Graduate’s salary. It came as a saviour and the couple were compelled to take the loan up as there was no other alternative.

Once money was in hand, even threats become opportunities in disguise. Mr Graduate took the personal loan to clear off debts, but spent it on furnishing the house.

Therefore, he ended up paying interest not only to credit cards, but also for the personal loan. In the middle of all this, he got a driving licence and the dream of driving the best car compelled him to buy a brand new one. The best part was that he did not have to pay immediately, as the car was financed by the bank and his actual instalments started after three months of purchase. Mr Graduate was in the company of friends who believed –“Live for today because who has seen tomorrow? Enjoy buddy!”

Now, how could he deny himself the pleasure of having the best mobile phone with latest features and the best watch when credit cards were there to help? To sum it up –before he actually realised what he had done, he ended up paying almost 20-25% of his salary in instalments for his short-term aspirations and dreams.

At this point of time, he could have gone for a decent secondhand car.

Mr Graduate, who came here to make money, ended up earning money for paying credit card bills, personal loans and house rent.

After talking to him, Mr Graduate confessed that he would have been much happier back home with the same lifestyle and less stress, than coming to this part of the world.

By the time he realised that he had come to the Gulf not only to make money, fulfil his dreams and aspirations, but also to save money, it was time to go back home.

Do not fall into credit cards trap and do not live beyond means.

Life in the Gulf is even more challenging than we think. The amount you earn during your working life not only goes towards taking care of your regular expenses –eating, buying lifestyle items, entertainment, and so on–it also needs to meet your aspirations, such as buying a house, paying for your children’s education, marriage, retirement and others.

The moral of the above story is “Pay yourself first” before you pay to credit cards, personal loans, and rent authorities.

(It is a true story of an NRI, whom the writer met recently. Mr Graduate’s real name has been withheld). The writer is a certified financial planner and full member of FPSB India, and currently based in Dubai.

FPSB India relies on its Members’ prudence, competence, and ethical standards to have submitted this write up in good faith in their personal respective capacities. The article and the views are those of the writer and do not represent those of FPSB India.

Readers are advised to consult their professional financial planners for advice.