9 common financial mistakes UAE residents make - and how to avoid them

From poor planning to living beyond your means and more, here are the pitfalls to watch out for

Illustration by Mathew Kurian

Everybody makes mistakes but if you mishandle your personal finances it could cost you a small fortune.

Buying poor-performing investment plans, not having an emergency fund or failing to prepare for unexpected illness or death are only three slip-ups that could cost your family dearly.

Here are the nine of the most common financial mistakes UAE residents make, and how to avoid them.

1. Not building up an emergency cash account

There aren't many rainy days in the UAE, but you still need to save for them, just in case. A rule of thumb is to keep the equivalent of three to six months' spending money in an easy-access savings account for an emergency.

Stuart Ritchie, director of wealth management at AES International, says think about what sickness or unemployment would do to your finances. “Then plan how much money you will need and where you should keep it.”

Expatriate residents should consider keeping the money in an offshore account, he says. “There’s a critical financial rule expats should follow: if you’re from country A and live in country B, then you should bank in country C.”

But there are also high-interest savings accounts in the UAE or prize-linked accounts – where savers can win big cash prizes on their deposits – for those that prefer to keep their money closer to home.

2. Living beyond your means

It is too easy to get carried away with fancy cars and shopping trips to the malls, but you must keep some salary in reserve.

Tuan Phan, board member of SimplyFI, a non-profit community of UAE investment enthusiasts, says aim to save at least 15 per cent of your monthly earnings. "Draw a monthly budget and stick to it. Don't buy things you don't need, with money you don't have, to impress people you don't even like."

Living beyond your means has left many residents in chronic debt, as they take out loans and run up balances on credit cards to meet an excessive lifestyle.

Mr Phan says too many squander their salary on interest payments, as average credit card interest rates hover around the 40 per cent mark in the UAE. “You do not want to spend 20 years working in the UAE being constantly in debt with no savings or assets to show for it. It’s always better to be wealthy than look wealthy but with large debts.”

Mr Ritchie says spending less than you earn is the key, but easier said than done. “Have honest conversations about whether certain expenses are needs, wants or luxuries.”

3. Getting unregulated advice

There are still too many unregulated financial advisers in the UAE preying on the unsuspecting, so watch out.

Mr Ritchie says these advisers push products that benefit them – not you. “This gives them an incentive to lock you into inflexible and poor-performing products.”

Look for an adviser who legally works for you, known as a fiduciary, and charges a fee for their time. “Avoid anyone who earns commission from selling financial products who is effectively an agent for a product provider.”

He suggests searching the online database of the Chartered Insurance Institute to find a chartered financial planner working in the UAE.

4. Locking into savings plans

One of the biggest mistakes new arrivals make is to be talked into buying an offshore investment bond – where investors deposit a lump sum – or a contractual savings plan, which can lock you in for up to 25 years. Both come with hefty charges and are currently under review by the UAE Insurance Authority, which released a latest draft of new regulations that aim to clamp down on misselling practices.

Cancel a contractual savings policy early, for example, and you are still liable for the charges of the product for the full term.

Mr Phan says: “Of all the investments products in the world, I can’t think of a worse one than life-insurance products colloquially known as 'savings plans'.”

The products have hidden commission, high ongoing costs, inflexible platforms, complicated structures and poor portfolio construction, he says. “This makes it mathematically improbably for any investor to make any real return over any time period under any economic situation.

"A simple, low-cost investment platform selling exchange traded funds (ETFs) is all most people need.”

5. Inadequate will and inheritance planning

Many residents believe their assets will be subject to the inheritance rules in their home countries, rather than their new one.

Mr Ritchie says rules go by your country of domicile rather than residence. “It’s very difficult to change domicile so expert planning is required. “Take advice on writing a will to cover your asset in various jurisdictions to ensure your wishes will be followed.”

In the UAE, non-Muslims can draw up and register wills for their UAE assets that follow common law; this authenticates the document and ensures your wishes are carried out. This can be done at the Dubai Courts, the DIFC Wills Service Centre and the Non-Muslim Wills & Probates Office at the Abu Dhabi Judicial Department. The cost to notarise or register a will starts from Dh950 at the ADJD to as much as Dh15,000 at DIFC.

Residents still need to draw up the will, with costs varying between Dh1,200 and Dh6,000, depending on whether it is online or with a professional legal firm and the type of will – from guardianship wills to full wills.

6. Failing to haggle on major buys

Haggling isn’t just for the souqs. Mr Phan says you can also make savings by negotiating on big-ticket items such as your rent, car and white goods. “All it takes is knowing what you are after, then simply ask.”

So, when discussing house rentals, you could push for a reduced price if you pay with one cheque instead of four. “You could ask a car dealer to throw in, say, premium leather seats, an audio package or free servicing for the same price.”

Or ask for a discount, free delivery or extended warranty if buying white goods or furniture with cash.

Mr Phan says now is a good time to chance your arm, especially in the housing market. "You won't get what you don't ask for."

7. Not planning for the future

Vijay Valecha, chief market analyst at Century Financial in Dubai, says investing is how we build wealth for the future but it is a long and bumpy road. "You need to start as early as possible to save enough.”

Younger investors should be more aggressive by investing, say, 70 per cent in shares and commodities, and the remainder in lower-risk products such as bonds. Older investors should reduce their stock-market exposure, depending on when they want to retire.

Steve Cronin of financial community DeadSimpleSaving.com advocates a low-cost investment approach, where residents set up a brokerage account with companies such as Interactive Brokers, Internaxx, Saxo Bank or Swissquote to invest in a globally diversified portfolio of low-cost, passive index-tracking ETFs.

8. Ignoring tax obligations back home

For non-Emiratis, it doesn’t matter where you create your wealth, as long as you are clear about the local tax implications and restrictions on capital transfers, Mr Valecha says.

“Certain countries like India and China might have capital gains taxes, stamp duty on property or foreign exchange restrictions on their citizens that prevent free movement of capital.”

As a general rule you pay tax in the country where you generate your income, although some authorities will look to tax your global earnings, including the US and South Africa.

Mr Valecha says: “The UAE has liberal economic policies and expatriates can allocate capital into any geography of their choice, for example, the country in which they want to retire. They should seek help from a proper wealth manager.”

9. Failing to get life insurance

Death may be an irreplaceable emotional loss but you can replace the lost income if you plan ahead.

Mr Valecha says if you are the breadwinner with dependents, you must take out life insurance and high premiums are no excuse. The cheapest option is a term-assurance plan, where you pay premiums for a set period and it pays out if you die during that time.

Term assurance has no cash-in value or investment element, which keeps it simple and cheap. “You can combine it with critical illness cover to give you protection against serious conditions such as cancer, heart disease or stroke," he says.