Consumers tend to split their repayments between higher- and lower-interest debt rather than focusing on the more expensive liabilities first. Elise Amendola, AP
Consumers tend to split their repayments between higher- and lower-interest debt rather than focusing on the more expensive liabilities first. Elise Amendola, AP
Consumers tend to split their repayments between higher- and lower-interest debt rather than focusing on the more expensive liabilities first. Elise Amendola, AP
Consumers tend to split their repayments between higher- and lower-interest debt rather than focusing on the more expensive liabilities first. Elise Amendola, AP

Poor financial literacy is costing consumers dearly


  • English
  • Arabic

Suppose you have two loans. The first is a student loan of US$40,000 with an interest rate of 6 per cent, and the second is a credit-card balance of $12,000 with an interest rate of 11 per cent. You find that at the end of each month, you have about $1,000 left over, and you want to use it to pay down the principal on your debts. That’s sensible. So how much do you put toward each loan?

The rational thing to do would be to pay off the 11 per cent loan before even starting to repay the 6 per cent loan. This is not a matter of taste, it is just simple maths. After all, every dollar you spend paying down the credit card would otherwise be growing at 11 per cent a year, which is faster than 6 per cent a year. If you can, always pay down your debts starting with the highest interest rate.

But that is not what most people do. According to new research by economists John Gathergood, Neale Mahoney, Neil Stewart and Joerg Weber, they instead tend to split their repayments between higher- and lower-interest debt. Gathergood, and his fellow researchers, looked at consumers in the United Kingdom who had two credit cards, who made their minimum payments on time, and who carried balances on both cards - in other words, people who had enough money to pay down some of their debt at the end of each month.

The difference in interest rates between the two cards tended to be large - 6.3 percentage points on average. This meant there’s a big incentive to pay down the higher-interest one first. But the authors found that on average, after making their minimum payments, borrowers allocated only 51.5 per cent of their extra payments to the higher-interest card. Only 10 per cent of borrowers devoted all of their payment toward eliminating the more expensive debt.

Instead, the researchers found that many borrowers tended to allocate their extra payments in proportion to how big the balances are on each credit card - if 70 per cent of their debt is on the low-interest card and 30 per cent on the high-interest one, they sent 70 per cent of their repayment cash to the former and 30 per cent to the latter. This behaviour is known as balance matching.

There's really no good way to spin this behaviour as rational. It could be that larger balances create more anxiety in people's minds, causing them to throw more money toward the bigger debt. Or people could be financially unsophisticated, and simply not realise they are leaving money on the table. Either way, the result is that borrowers end up poorer.

______

Read more:

Bounced cheques in UAE: new rules 'a progressive step for the justice system'

It is possible to restructure debt directly with UAE banks, a Sharjah resident reveals how

A nine-step guide to help you renegotiate bank debts in the UAE

How an Abu Dhabi resident took three UAE banks to court and cleared Dh700,000 debt

How to file a case against your bank over escalating credit card debt

_____

This brings us to the topic of the Consumer Financial Protection Bureau in the United States.

Created in 2010 as part of the Dodd-Frank financial reform, the CFPB is supposed to protect financial consumers from predatory lending practices and unsafe financial products. As Elizabeth Warren, now a senator from Massachusetts, put it in 2007: "It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street. ... Why are consumers safe when they purchase tangible consumer products … but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?"

Now, like many other parts of the government, the CFPB is under siege by the administration of president Donald Trump. Mr Trump's method of attack follows a familiar pattern - instead of abolishing the agency, he simply gave the CFPB an interim director who despises the agency's intended mission and purpose. That director is Mick Mulvaney, who has called the agency he now captains "a joke…in a sick, sad way", and "an awful example of a bureaucracy gone wrong". Under Mr Mulvaney, the agency has modified its mission statement to include financial deregulation. It has also implemented a freeze on hiring, rule-making and data collection.

This is a bad time to divert the CFPB from its original mission of protecting consumers. Though households are slightly less indebted than before the financial crisis, they still owe an amount equal to 80 per cent of gross domestic product:

Meanwhile, credit-card debt continues to climb. And although credit-card interest rates have come down, they still average about 13 percent.

Meanwhile, student-loan debt is at record highs, reducing many households’ ability to repay their credit cards, especially if they follow the suboptimal repayment behaviour documented by the researchers mentioned above.

If anything, the latest research - and that of other economists  shows that the CFPB’s mission needs to extend beyond merely protecting consumers from the kind of predatory lending practices that were common before the crisis.

Financial literacy in the US is extremely low. Let's hope the public-school curriculum can be modified to teach future generations how to manage money, but in the meantime, the CFPB is the only institution in the country that can help people better understand finance.

With leadership like Mr Mulvaney’s, it seems highly unlikely the agency will take on such a role. Although economists are finding more and more ways that consumers need more financial guidance, the government is moving in the opposite direction.

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University

RESULT

Australia 3 (0) Honduras 1 (0)
Australia: Jedinak (53', 72' pen, 85' pen)
Honduras: Elis (90 4)

Sole survivors
  • Cecelia Crocker was on board Northwest Airlines Flight 255 in 1987 when it crashed in Detroit, killing 154 people, including her parents and brother. The plane had hit a light pole on take off
  • George Lamson Jr, from Minnesota, was on a Galaxy Airlines flight that crashed in Reno in 1985, killing 68 people. His entire seat was launched out of the plane
  • Bahia Bakari, then 12, survived when a Yemenia Airways flight crashed near the Comoros in 2009, killing 152. She was found clinging to wreckage after floating in the ocean for 13 hours.
  • Jim Polehinke was the co-pilot and sole survivor of a 2006 Comair flight that crashed in Lexington, Kentucky, killing 49.
KLOPP%20AT%20LIVERPOOL
%3Cp%3EYears%3A%20October%202015%20-%20June%202024%3Cbr%3ETotal%20games%3A%20491%3Cbr%3EWin%20percentage%3A%2060.9%25%3Cbr%3EMajor%20trophies%3A%206%20(Premier%20League%20x%201%2C%20Champions%20League%20x%201%2C%20FA%20Cup%20x%201%2C%20League%20Cup%20x%202%2C%20Fifa%20Club%20World%20Cup%20x1)%3C%2Fp%3E%0A
Financial considerations before buying a property

Buyers should try to pay as much in cash as possible for a property, limiting the mortgage value to as little as they can afford. This means they not only pay less in interest but their monthly costs are also reduced. Ideally, the monthly mortgage payment should not exceed 20 per cent of the purchaser’s total household income, says Carol Glynn, founder of Conscious Finance Coaching.

“If it’s a rental property, plan for the property to have periods when it does not have a tenant. Ensure you have enough cash set aside to pay the mortgage and other costs during these periods, ideally at least six months,” she says. 

Also, shop around for the best mortgage interest rate. Understand the terms and conditions, especially what happens after any introductory periods, Ms Glynn adds.

Using a good mortgage broker is worth the investment to obtain the best rate available for a buyer’s needs and circumstances. A good mortgage broker will help the buyer understand the terms and conditions of the mortgage and make the purchasing process efficient and easier. 

Sri Lanka World Cup squad

Dimuth Karunaratne (c), Lasith Malinga, Angelo Mathews, Thisara Perera, Kusal Perera, Dhananjaya de Silva, Kusal Mendis, Isuru Udana, Milinda Siriwardana, Avishka Fernando, Jeevan Mendis, Lahiru Thirimanne, Jeffrey Vandersay, Nuwan Pradeep, Suranga Lakmal.

UAE currency: the story behind the money in your pockets
UAE currency: the story behind the money in your pockets
Monday's results
  • UAE beat Bahrain by 51 runs
  • Qatar beat Maldives by 44 runs
  • Saudi Arabia beat Kuwait by seven wickets
Aldar Properties Abu Dhabi T10

*November 15 to November 24

*Venue: Zayed Cricket Stadium, Abu Dhabi

*Tickets: Start at Dh10, from ttensports.com

*TV: Ten Sports

*Streaming: Jio Live

*2017 winners: Kerala Kings

*2018 winners: Northern Warriors

LA LIGA FIXTURES

Thursday (All UAE kick-off times)

Sevilla v Real Betis (midnight)

Friday

Granada v Real Betis (9.30pm)

Valencia v Levante (midnight)

Saturday

Espanyol v Alaves (4pm)

Celta Vigo v Villarreal (7pm)

Leganes v Real Valladolid (9.30pm)

Mallorca v Barcelona (midnight)

Sunday

Atletic Bilbao v Atletico Madrid (4pm)

Real Madrid v Eibar (9.30pm)

Real Sociedad v Osasuna (midnight)

The specs: 2018 Nissan Patrol Nismo

Price: base / as tested: Dh382,000

Engine: 5.6-litre V8

Gearbox: Seven-speed automatic

Power: 428hp @ 5,800rpm

Torque: 560Nm @ 3,600rpm

Fuel economy, combined: 12.7L / 100km

How much of your income do you need to save?

The more you save, the sooner you can retire. Tuan Phan, a board member of SimplyFI.com, says if you save just 5 per cent of your salary, you can expect to work for another 66 years before you are able to retire without too large a drop in income.

In other words, you will not save enough to retire comfortably. If you save 15 per cent, you can forward to another 43 working years. Up that to 40 per cent of your income, and your remaining working life drops to just 22 years. (see table)

Obviously, this is only a rough guide. How much you save will depend on variables, not least your salary and how much you already have in your pension pot. But it shows what you need to do to achieve financial independence.

 

Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

Results

4.30pm Jebel Jais – Maiden (PA) Dh60,000 (Turf) 1,000m; Winner: MM Al Balqaa, Bernardo Pinheiro (jockey), Qaiss Aboud (trainer)

5pm: Jabel Faya – Maiden (PA) Dh60,000 (T) 1,000m; Winner: AF Rasam, Tadhg O’Shea, Ernst Oertel

5.30pm: Al Wathba Stallions Cup – Handicap (PA) Dh70,000 (T) 2,200m; Winner: AF Mukhrej, Tadhg O’Shea, Ernst Oertel

6pm: The President’s Cup Prep – Conditions (PA) Dh100,000 (T) 2,200m; Winner: Mujeeb, Richard Mullen, Salem Al Ketbi

6.30pm: Abu Dhabi Equestrian Club – Prestige (PA) Dh125,000 (T) 1,600m; Winner: Jawal Al Reef, Antonio Fresu, Abubakar Daud

7pm: Al Ruwais – Group 3 (PA) Dh300,000 (T) 1,200m; Winner: Ashton Tourettes, Pat Dobbs, Ibrahim Aseel

7.30pm: Jebel Hafeet – Maiden (TB) Dh80,000 (T) 1,400m; Winner: Nibraas, Richard Mullen, Nicholas Bachalard

In numbers: China in Dubai

The number of Chinese people living in Dubai: An estimated 200,000

Number of Chinese people in International City: Almost 50,000

Daily visitors to Dragon Mart in 2018/19: 120,000

Daily visitors to Dragon Mart in 2010: 20,000

Percentage increase in visitors in eight years: 500 per cent

UAE currency: the story behind the money in your pockets
Top%2010%20most%20competitive%20economies
%3Cp%3E1.%20Singapore%0D%3Cbr%3E2.%20Switzerland%0D%3Cbr%3E3.%20Denmark%0D%3Cbr%3E4.%20Ireland%0D%3Cbr%3E5.%20Hong%20Kong%0D%3Cbr%3E6.%20Sweden%0D%3Cbr%3E7.%20UAE%0D%3Cbr%3E8.%20Taiwan%0D%3Cbr%3E9.%20Netherlands%0D%3Cbr%3E10.%20Norway%0D%3Cbr%3E%3C%2Fp%3E%0A
The specs: 2018 Nissan 370Z Nismo

The specs: 2018 Nissan 370Z Nismo
Price, base / as tested: Dh182,178
Engine: 3.7-litre V6
Power: 350hp @ 7,400rpm
Torque: 374Nm @ 5,200rpm
Transmission: Seven-speed automatic
​​​​​​​Fuel consumption, combined: 10.5L / 100km

Results
%3Cp%3E%3Cstrong%3EStage%207%3A%3C%2Fstrong%3E%3Cbr%3E1.%20Adam%20Yates%20(GBR)%20UAE%20Team%20Emirates%20%E2%80%93%203hrs%2029min%2042ses%3Cbr%3E2.%20Remco%20Evenepoel%20(BEL)%20Soudal%20Quick-Step%20%E2%80%93%2010sec%3Cbr%3E3.%20Geoffrey%20Bouchard%20(FRA)%20AG2R%20Citroen%20Team%20%E2%80%93%2042sec%3Cbr%3E%3Cstrong%3EGeneral%20Classification%3A%3C%2Fstrong%3E%3Cbr%3E1.%20Remco%20Evenepoel%20(BEL)%20Soudal%20Quick-Step%3Cbr%3E2.%20Lucas%20Plapp%20(AUS)%20Ineos%20Grenaders%20%E2%80%93%2059se%3Cbr%3E3.%20Adam%20Yates%20(GBR)%20UAE%20Team%20Emirates%20%E2%80%9360sec%3Cbr%3ERed%20Jersey%20(General%20Classification)%3A%20Remco%20Evenepoel%20(BEL)%20Soudal%20Quick-Step%3Cbr%3EGreen%20Jersey%20(Points%20Classification)%3A%20Tim%20Merlier%20(BEL)%20Soudal%20Quick-Step%3Cbr%3EWhite%20Jersey%20(Young%20Rider%20Classification)%3A%20Remco%20Evenepoel%20(BEL)%20Soudal%20Quick-Step%3Cbr%3EBlack%20Jersey%20(Intermediate%20Sprint%20Classification)%3A%20Edward%20Planckaert%20(FRA)%20Alpecin-Deceuninck%3C%2Fp%3E%0A
How to avoid crypto fraud
  • Use unique usernames and passwords while enabling multi-factor authentication.
  • Use an offline private key, a physical device that requires manual activation, whenever you access your wallet.
  • Avoid suspicious social media ads promoting fraudulent schemes.
  • Only invest in crypto projects that you fully understand.
  • Critically assess whether a project’s promises or returns seem too good to be true.
  • Only use reputable platforms that have a track record of strong regulatory compliance.
  • Store funds in hardware wallets as opposed to online exchanges.