The 18-year-old was taken to hospital in a serious condition
Meet the Kumars, a family of five, which includes a couple in their 30s, two young kids, and a nanny. Kumars had been using plastic money for over seven years but barely remember the last time they had paid off their credit card total outstanding in full. Last summer frustrated by the almost never changing credit card statement, the family negotiated with their bank, converted the outstanding into easy monthly installments, and closed their credit card. It was a smart decision since they were unable to keep up with the spending and paying back cycle.
Liberal use of plastic money has pushed many into a debt trap. Credit cards work for those who are disciplined enough to pay their dues in full every month without shelling a single dirham as interest or finance charge to the credit card company.
An interesting concept in behavioural economics suggests the reasons why plastic money often leads to trouble for many of us. Referred as the ‘pain of paying’, this is the psychological discomfort experienced when parting with one’s money. The less it hurts, the more people can spend. The immediacy of pain, as we often experience, is higher in cash transactions. In comparison, the pain of paying is relatively less when dealing with plastic money, especially through credit cards that ease the agony of depleting funds by postponing payments and offer a multitude of reward programmes including cash back.
If you are unable to pay off your credit card in full every month it would be wise to close the account instead of using it as an overdraft facility. It’ll help in exercising restraint and fighting the lure of flash sales and countless discounts.
Building a good cash flow system, too, can help you align your expenses with your income. What we are suggesting here is setting boundaries on how and where we spend by opening different accounts. Most of the banks in the UAE allow opening sub-accounts through online banking portals. Think of your short-term goals and dedicate respective accounts to them. For instance, if you like to have a good holiday this year, start a recurring deposit account and call it a holiday fund. It would perhaps incentivise you to stash that cash away. Make an account for monthly savings and one for rent, if you pay on annual or semi-annual basis.
As behavioural economics suggests, putting a label on money prevents people from using it for any other purpose. The idea is to think through your money goals and align saving and spending with it. Families with children can use this method to save for kids’ special projects and annual activities. Individuals can use it to stash cash for downpayment of a car, house, or simply buying your prized phone or a gaming console.
There are no one-size-fits-all solutions when it comes to money management. At the end of the day, your money attitude defines your relationship with it.
Housekeeping tips:
1) Don’t save credit or debit card details on online shopping websites
2) Do not use a credit card to afford a standard of living that is beyond your income
3) Automate your payments for your recurring monthly bills, if you are bad at keeping up with due dates
4) Do not roll over credit card debt. It is too expensive
5) Create sub-accounts in your main bank account for saving, investing and spending
suneeti@khaleejtimes.com
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