I am the breadwinner of my family of five and earn a monthly salary of Dh18,000 as a chef in a hotel. I have never taken my family on vacation except to my home country Sri Lanka.
Following the movement restrictions of the Covid-19 last year, we wanted to take a break and decided to finally take a vacation. However, I didn’t want to use our savings to pay it off, so I took out a personal loan of 30,000 Dh. I used all the money to book the plane tickets and pay for the vacation in Paris.
However, my salary has since been cut by 20% after the pandemic and I now struggle to cope with loan repayments, three children’s school fees, credit card debt and other charges. subsistence.
My loan payment each month is 4000 Dh, I have credit card dues worth 12,000 Dh and other expenses worth around 11,000 Dh each month. I also have to give my parents money every month since they depend on me. I’m struggling to make ends meet and dipping into my savings is my last resort.
With the uncertainty we endured last year, I want to have the cushion of an emergency fund in case things go wrong. What are my options for getting out of this debt spiral? LM, Sharjah
Debt Panelist 1: Steve Cronin, Founder of DeadSimpleSaving.com
I understand the importance of keeping your family happy and making amazing memories together, especially after lockdown. Hope you all had a good time in Paris.
As you travel, you can take advantage of the planning, the experience, and the memory, so it’s generally good value for the money, especially if you can control your budget.
I also understand that you don’t want to cut corners on your savings, which will secure your future. Unfortunately, this is now what you will probably need to do.
Getting into debt is not the right way to pay for a vacation. A loan is best made against an asset that holds at least its value. The properties are fine, with the risk that the value will go down, and the value of a used car goes down more slowly than that of a new car.
Borrowing for a vacation requires a personal loan or a credit card, and both are dangerous if your pay goes down. Plus, you seem to have borrowed for the holidays while already having credit card payments and spending over Dh23,000, plus whatever you send to your parents.
Since your salary was Dh18,000, you could not pay off the loan even before your salary was reduced. What you should have done was create a sinking fund for your vacation and invest 1000-2000 Dh every month until you have saved enough for a debt free vacation. It requires advanced planning and discipline.
It’s not clear if you have a credit card balance that you renew each month or if you pay it off in full. If you are renewing the balance, you should consider a consolidation loan that will merge your credit card debt and personal loan debt at a lower overall interest rate.
Assuming the interest rate on your personal loan is greater than a 5% reduction rate, you should probably use your savings to pay it off. This will free up part of your salary to cover your other expenses and possibly start saving again. Your main problem is not juggling interest rates between your debt and your savings or investments. Your problem is cash.
You can’t keep spending more each month than you earn. You need to increase your income and reduce your expenses quickly. Can you keep an eye out for other jobs? Can you earn some extra money? Does your wife work?
You need to cut your expenses below your income, even if it means making tough decisions about what to cut. Look at the big items and the small items that add up over the course of the month.
Go through your card statements and receipts to identify expenses that are not essential. Invite your whole family to come up with ideas – it will be a useful lesson for them and there is no shame. They had a great vacation and now is the time to tighten the belt.
Once you are able to save money each month, you can replenish your savings and possibly start investing for the future.
Panelist on Debt 2: Philip King, Head of Retail Banking at Islamic Bank of Abu Dhabi
Your instinct for creating an emergency fund is right. We should all save at least three months of salary in case the worst happens.
However, given your recently reduced salary and increased debt levels, it is unlikely that you will be able to afford to build an emergency fund right now. However, you mentioned that you chose to finance your family vacation with new debt rather than your savings.
I strongly advise you to meet with your bank. They might suggest consolidating your debts into one loan so that you are better off in the long run if you pay off debt and credit cards in installments.
If you have enough savings to do so, it will ease your monthly expenses, alleviate what is undoubtedly a huge personal level of anxiety, and give you a budget break to slowly start building your savings again.
If your savings do not cover Dh 30,000, then you should contact your banker as soon as possible to discuss your situation.
Your bank might react sympathetically to these circumstances and might help you either refinance your loan or agree to a lower monthly repayment rate. If you are refinancing, make sure the monthly payments are affordable. Talk to them openly and you can most likely come to a mutually acceptable solution.
I also strongly advise against taking on more medium-term credit in order to build up your emergency fund and restore a good credit rating.
If and when a crisis does strike, this fund will give you the confidence you need to get through it and help you avoid borrowing, which is never a good idea in uncertain times. Good luck with that.
Panelist 3: Carol Glynn, founder of Conscious Finance Coaching
It is not advisable to take out a personal loan to pay for vacations. It’s now over, but you pay off the loan with additional interest. Use this experience as a lesson to pay for your vacation only with your savings.
Contact your bank to explain that your salary has been reduced and discuss debt restructuring. If you extend the term of the loan, you will be able to reduce the monthly payment.
This will cost more in interest in the long run than your current deal, but if you are unable to make payments, it is cheaper because defaulting, paying late fees and compounding interest. your debt will increase. You will also need to consider the negative impact on your credit score.
It is extremely important to pay off your credit card debt as soon as possible. They carry very high interest rates and default fees and can snowball quickly.
If you have enough funds in your savings, consider using it to clear your credit card. Otherwise, talk to the bank about a consolidation loan that combines your vacation loan and your credit card debt. Then cancel your card so you won’t be tempted to go into debt again while you’re still paying off your personal loan.
It makes a lot of sense to have an emergency fund and well done to have one. Its main purpose is to allow you to cover unforeseen expenses when needed.
One of the reasons we recommend that people save an emergency fund is the inability to service your debt. I urge you to consider using at least some of this to help pay off your debts.
The Debt Panel is a weekly column designed to help readers tackle their debts more effectively. If you have a question for the panel, write to [email protected]
Update: December 15, 2021 5:00 a.m.