Residents prefer to pay off debt

UAE residents are more likely to use their income to pay off debt on items such as credit cards, personal and home loans as opposed to putting funds into savings accounts for the future, according to an Emirates 24|7 poll.

A majority (68 per cent) stated that they want to pay-off their debt, especially after the recession, underlining that an air of uncertainty and caution remains around the attitudes of consumers following the turbulent past few years. Since the global economic downturn, consumers have been far more cautious in their spending and prefer not to accumulate debt that might put them under pressure. To avoid mistakes of the past, many people are prioritising their debt over storing cash.

"Saving rates are low so there's not really that much incentive for me to save. On the other hand, banks are still charging a lot of interest on the money they lend, so I'd rather pay off my higher borrowing debt," said a respondent.

Not everyone agrees on the question of putting debt first, though. There are people who prefer a reserve fund for a rainy day. Twenty four per cent of participants said they would have an emergency fund before repaying their debt, whereas 8 per cent were unsure about their financial priorities.

“Getting a cash cushion in place should be the top priority, especially if you have a family. Moreover, paying down debt over saving may not be the best option as everybody is not very disciplined when it comes to money. If I have surplus cash once the debt is paid off, I may tend to over-spend, which is not a good thing,” said a respondent who opted to save before becoming debt-free.

In this uncertain economy, you should be looking to have money to cover at least 10 months of expenses where you can readily put your hands on it, says Fox.

In the book, All Your Worth: The Ultimate Lifetime Money Plan by Elizabeth Warren and Amelia Tyagi, they define a Balanced Money Formula, which is based on a person’s net income. Warren and Tyagi say that, ideally, no more than 50 per cent of a person’s paycheck should be spent on needs (and keeping them below 35 per cent is best). Of the remaining amount, at least 20 per cent should be devoted to saving, while up to 30 per cent can be spent on wants.