If the Covid-19 pandemic has taught us one thing about our finances, it is the importance of having a safety net for emergencies and setting up long-term savings goals. Taking the leap and starting a regular savings plan can be an insurmountable task for many, but with the right approach and advice it can be done.
The biggest barriers to saving money are not following a budget, a lack of financial literacy, no savings goals, too much debt in the form of loans and credit cards, needless spending and procrastination.
Around half (49 per cent) of all expatriates in the UAE are only able to save 5 per cent or less of their monthly income, according to a survey conducted by Insight Discovery and YouGov last year. Despite earning more in the UAE than they would in their home country, many expatriates tend to get carried away with leading lifestyles that are beyond their means, which puts their financial security at risk.
“Often seen as a very difficult and complex process, saving is actually very simple if one plans it,” Vijay Valecha, chief investment officer at Century Financial, says. “Incorporating healthy spending habits and budgeting can help everyone abide by a savings plan.”
When you work on your budget, financial advisers recommend dividing it into three sections. This is called the 50:30:20 rule. Half of your pay should go towards “needs”, such as housing, food, healthcare and transportation, 30 per cent to “wants”, such as dinners, holidays and other "treats", and 20 per cent to savings and debt repayment.
“The rule ensures that everyone stays within their income and manages expenses in a way that there is always savings for a rainy day. People need to realise this more than ever since the pandemic has taught us the real need for having sustainable savings,” Mr Valecha adds.
We spoke to financial planning experts to compile a few easy steps for you to save money.
Keep track of your spending
If you know where your money is going, it will be easier to make changes and prevent overspending. There are several personal finance apps that will help you track your money, find new ways to save, build your credit score and alert you when you exceed your spending threshold. Some of the most popular budget management apps are Mint, Fudget, Wally, You Need A Budget, Goodbudget, Splitwise and Toshl, among others.
Meanwhile, some people still prefer using Excel spreadsheets to manage their money.
“Create a spreadsheet of your expenditure. A lot of people do not keep a record of their income and expenditure, so they do not know what they are spending each month,” says Rupert Connor, a partner at Abacus Financial Consultants. “The very exercise of creating a spreadsheet will allow someone to have visibility of their outgoings and be the basis of setting a budget to then stick to.”
Pare down excess debts
Reducing personal debt is the best way to free up your income for saving. The fastest way to pay off debt is in the order of smallest to largest, Mr Connor says.
“Unscrupulous habits like spending beyond one’s means by borrowing in excess via a number of credit cards or taking frequent loans to fund a lavish lifestyle only add to an individual’s woes,” Mr Valecha says.
Interest paid on servicing current and unwanted debt will send an individual’s savings plan in a downspin, he adds. The UAE has one of the world's highest credit card interest rates at 2.5 per cent to 3.5 per cent per month.
“On an annualised basis, the interest rate turns out to be 42 per cent in the higher slab range. Combining this with other associated costs such as late fees, annual fees and foreign exchange charges, the costs are even higher,” Mr Valecha says.
If a borrower has high credit card debt, they should be aware of how compound annual interest works. Compounding is the process of adding the accrued interest into your unpaid balance, so that you are paying interest on interest.
“Compounding interest in a product such as credit card can increase the net amount of debt payable over the longer term. Individual borrowers should try to pay down their credit card bills on a monthly basis. Just paying the minimum amount due will only increase the borrower’s net debt burden,” Mr Valecha says.
Opt for automatic saving
Set up your bank account to automatically transfer funds from your debit account into a savings account every month.
One of the oldest rules of personal finance is to pay yourself first. Most people save what’s left over at the end of the month after paying bills and discretionary spending.
“Set aside approximately 20 per cent of your income per month to pay yourself and save for your future. This is especially true for expatriates in the UAE where we are all responsible for our own savings rather than relying on a government or company set-up,” Mr Connor says.
Set savings goals
One of the best ways to save money is by visualising what you are saving for. For instance, this could be early retirement, buying a home either in the UAE or elsewhere, or private education for your children.
Set a timeline to achieve this financial goal. The sooner the deadline, the more aggressively you will have to save. This could include deciding on the duration of your savings plan.
“A person saving over the next five-year horizon will have a very different savings perspective when compared with an individual who is saving over his lifetime for retirement,” Mr Valecha says.
For instance, a person who is saving for a five-year period will likely require cash much earlier than a person who is planning to save over the longer duration.
“This essentially implies that a shorter duration savings will see the individual dipping into his savings fund for additional emergency as well as other necessary requirements," Mr Valecha says.
"An individual who is planning to save for retirement will likely ensure that his fund will grow over the longer term. This can be primarily done by not using these reserves for spending and other non-planned emergencies.”
To achieve your savings goal, you can use a personal finance app to determine where this money will come from and how to cut down on spending in specific areas. Once you know how much to save and the timeline, you can work towards achieving your savings goals. You could set aside that money into a separate dedicated account, which will enable you to track your savings progress.
Choose the right savings tools
Once the savings goal has been decided, the next step is to choose between different tools and strategies available.
“For instance, any individual saving for a very short term will require a highly liquid investment along with some sort of capital protection,” Mr Valecha says. “For long term, the individual’s expectation would be not only sizeable capital protection but also enhanced returns owing to longer duration.”
A highly liquid instrument means that it is possible to exit the fund with ease, while capital protection is when an individual chooses not to have any loss on their initial investment and overall savings. This could mean settling for lower returns since risk and return go hand in hand.
Mr Valecha says products that offer short-term capital protection include certificate of deposits, money market funds and other three-month to six-month bank products. Over a longer duration, capital protection products include sovereign and semi-sovereign bonds, municipality and agency bonds as well as other hybrid products that invest majority of their funds in such debts, he adds.
“Investing in stocks, whether or not it is a blue-chip, is always risky because the broader stock markets and their individual share components are always linked to underlying economic growth and other macro factors. A scenario of lower growth and recessionary cycle will likely deeply impact one’s portfolio,” Mr Valecha says.
The key to successful investing is to spread your money across different asset classes, such as bonds, equities and property.
Diversification reduces risk by allocating investments among various financial instruments, industries and categories. It aims to maximise returns by investing in different areas that would each react differently to the same event.
Up to 90 per cent of returns come from portfolio diversification, Mr Connor says. Once the asset allocation is determined, regularly monitored and rebalanced often, it will produce a greater return.
“You don’t have to buy stocks and shares yourself. You can do it with others in a collective [or pooled] investment fund. These collective funds reduce your risk by spreading your investment across a wide range of companies,” Mr Connor says.