By adopting a tiered approach to our consumption practices, with necessities placed at the base, followed by needs then topped with luxuries, the more difficult economic times become somewhat easier to navigate, writes EBRAHIM TOOTLA.
THE price of all essential items is consistently increasing, from the price of fuel, your favourite coffee or the cost of bread. This increase is attributed to inflation, the increase of cost versus the decreasing value of money. A loaf of bread is more expensive but the size of the loaf remains the same. This phenomenon has brought about a great deal of pressure and stress on all households.
The problem is that our incomes are mostly fixed, with annual increases (hopefully); while the cost of our basic needs, such as electricity, food and fuel, increases monthly or sometimes even weekly. We are often left with only two options: increasing our income or decreasing our expenses.
Instantly increasing our income to manage our expenses is challenging, requiring us to exert ourselves even further in a second or third job. Islamic finance techniques provide us with some guidelines in preparing our spending plans. For instance, most of our consumption can be categorised in one of three levels: necessities (daruriyat), needs (hajiyat) or luxuries (tahsiniyat). This approach is different to the conventional distinction of needs and wants. By adopting a tiered approach to our consumption practices, with necessities placed at the base, followed by needs then topped with luxuries, the more difficult economic times become somewhat easier to navigate.
Daruriyat are identified as the necessities required for survival; lack of these necessities may lead to harm or loss of life. Items like shelter, food and clothing are included in this category but none of which are extravagant. For example, a simple house with one room is sufficient for shelter; basic food for nourishment and basic clothing (even if old) would provide cover.
Hajiyat are classified as needs that are not essential for survival but facilitate a certain level of ease. These include marriage, means of transportation and trade. Lack of these items would not constitute a life-or-death situation but their presence does facilitate ease. For example, owning a car makes life easier; however, it is not a necessity as one could use public transport.
Tahsiniyat are classified as the embellishments or luxuries that enable us to lead a more comfortable and lavish lifestyle. These may include a large house, luxury car or branded clothing. Even though they are not essential, they add value to our lifestyles if attained through halaal (permissible) means. Owning a cheap car would be regarded as hajiyat, and owning a luxury car would be regarded as tahsiniyat as it is an embellishment.
Islam teaches us to live within our means, and advises us to plan our spending in accordance with the above teachings. Most households have a fixed income and it is therefore imperative that a good understanding of expenses is achieved. Budgeting is an important tool in managing expenses and can be implemented by compiling a list of monthly expenses and splitting them into the abovementioned categories.
It is essential that, especially during challenging economic times, we avoid spending more money than we earn (swipe or tap cards only when necessary). A consistent comparison of our income earned with our expenses will allow us to keep tabs on our finances and even save to enhance our financial security.
The first thing to assess will be the tahsiniyat (embellishments). Within these, the key item to evaluate would be any unsecured financing products, like credit cards and overdrafts that are usually used to fund consumption. These products enable us to live beyond our means, therefore, going against the teachings of Islamic finance, which promotes asset backed financing for items that may provide sustained value.
Generally, if the item you purchase on credit cannot outlive the term of the debt then it should not be purchased. For example, purchasing a meal with a credit card that will be paid off over three months is less effective than purchasing a car on credit over five years. This is due to the meal being consumed instantly, whereas the car will continue to serve its purpose even after it has been paid off. Once the financing-based products are identified, start by reducing and paying off the most expensive debt first.
A mobile phone facilitates ease but does not necessarily have to be the latest model, and the same applies to a vehicle. This is especially true if these items are financed. To live within our means may mean downsizing or downgrading to reduce our monthly expenses, and prolonging the use of these items may drastically reduce our monthly instalments, thereby reducing our expenses.
After completing a proper evaluation of one’s income versus expenses, and if the expenses are still exceeding the income, the hajiyat (needs) should be assessed and reduced where possible. An applicable example would be switching from take-outs to home cooked meals. There is no need to go down to a barebones approach but the expenses that are resulting in an imbalance should be evaluated and then reduced where necessary.
Islam teaches us introspection (muhasabah), which can be implemented in all aspects of our lives, including the process in which we manage our funds and households. By properly examining the process, we become cognisant (of the reality) of our financial state, especially our income and expenses. Once we are able to properly assess our budgets on a monthly basis, we should then assess our weekly budgets, and as inflation decreases and the cost of goods and services are reduced, we will then have more room for hajiyat and tahsiniyat.
Self-discipline and self-accountability are key in maintaining a healthy household budget. With growing awareness, we will be able to easily establish our position to indulge in goods and services that are not a necessity. This will ultimately result in a less stressful lifestyle and more room to breathe within this ever-changing economy.
Ebrahim Tootla, CA (SA) CIPA, is Head of Finance and Treasury of Standard Bank Shariah on behalf of iConsult.