“Money doesn’t grow on trees.” “A penny saved is a penny earned.” “The best things in life are free.” You will have all heard these sayings about money at some point, but many are not particularly useful in everyday life. However, there are some "rules of thumb" on the subject of money that are worth learning, as they will help you when it comes to spending, housing, saving and debt.
We clearly need all the help we can get when it comes to money and financial literacy here in the UAE. There are 6.5 million credit facilities such as loans, credit cards, mortgages and overdrafts in the Emirates, according to November 2018 data from the Al Etihad Credit Bureau.
Meanwhile almost three in 10 UAE residents (27.8 per cent) are not saving any money at all, while 38 per cent are only saving 10 per cent of their income, a 2017 survey by Amazon-owned payment solutions company Payfort found.
Steve Cronin, founder of DeadSimpleSaving.com, an independent community for financial education in the UAE, says that once you put all your finances into a spreadsheet, it should only take four hours a year to manage it all and to invest monthly or quarterly. If your finances are in a mess, "work on them night and day until you are back on track".
Here are some more money guidelines for key areas of your financial life to help you make 2020 a good money year.
• Stick to the 28/36 rule
Ambareen Musa, founder and chief executive of comparison site Souqalmal.com, likes the 28/36 rule: don't spend more than 28 per cent of monthly income on household expenses and less than 36 per cent on debt repayments, including any mortgage. The Central Bank of the UAE says that a borrower's monthly debt repayments should not exceed more than half of their monthly income but Ms Musa says it is best to stay "well below that limit".
• Look for a sign-up bonus
On rewards credit cards with an annual fee, look for a sign-up bonus value equal to three years or more of its annual fee unless it has especially valuable rewards or benefits.
• Don’t use up more than 30 per cent of your credit card balances
This, says Ms Musa, is because if you go over that threshold, banks may see you as a risky borrower who could have trouble paying up on time. Tuan Phan, of non-profit community SimplyFI.org, goes further: he says the balance should be Dh0 at the end of a month. "The high interest in the UAE is crippling and it only takes a few months of borrowing and missed payments before fees and interest put people into a debt spiral they may never get out of," he warns.
• Stick to the 50/30/20 budget rule
When you put your budget together, calculate your percentages in three sections. Half of your take-home pay should go towards "needs", such as housing, food and transportation, 30 per cent to "wants" and 20 per cent to savings and debt repayment. However, Ms Musa says this is not a “foolproof” rule: two people earning the same salary may have “different personal circumstances”, with one single or with a family in their home country, and the other living with a family in the UAE.
Mr Phan says that extending your savings goal to 50 per cent saving may seem “ridiculously high” but that many expats do not have to pay income tax and have accommodation provided — amounts that can easily add up to 45-60 per cent of income in their home country. If you do manage to save more than 20 per cent, you can reduce the 50/30 accordingly.
• Use the rule of 10 for big purchases
For expensive, non-essential purchases, reflect on how buying that item make you feel in 10 days, 10 weeks and 10 years and give yourself cooling-off time (roughly one day per $100 or Dh367) before buying it. This might prevent you buying the item at all.
Mr Cronin says you should place more value on experiences such as holidays than on things such as gadgets or accessories. “Think about why you value them: is it secretly low self-esteem and keeping up with the Joneses?” he asks.
• Buy a term policy worth 10 times your gross annual income
This should be enough to support your dependents for 10 years, but it is only necessary if somebody else actually depends on your income. Mr Cronin says you do not need “expensive and complex” whole-life insurance, which includes an investment element, and will only need term insurance, which only pays out if you die, as long as your children are studying — which might be less than 10 years. Later, they can inherit your portfolio and won’t need to rely on an insurance payout, he adds.
Managing a windfall
• Spend half and save half
Mr Phan says you should spend half of any windfall, such as a bonus or pay rise, on “whatever you like” — but save the other 50 per cent to ensure you “do not overinflate your lifestyle to a level your income cannot afford”.
• Allocate 30 per cent of your monthly income to living costs
Your mortgage, including taxes and insurance, should not exceed 30 per cent of your gross monthly income. The same rule can be applied to tenants. Keeping accommodation costs to under a third of your income ensures both “comfort and affordability”, says Ms Musa, with enough left for other financial commitments and goals.
• Limit car costs to 20 per cent of your monthly take-home pay
First limit car payments on a loan to 10 per cent of your monthly income, as this ensures you keep your total car costs — petrol, insurance, repairs and maintenance — below 20 per cent of your income. Also, put 20 per cent down and limit the loan term to four years, as per UAE regulations. Mr Cronin, however, says you should avoid buying a new car with a loan as it is “pure vanity”. If forced to sell it within a year or two, you may even have to find extra cash to make up for its initial fall in value and pay off the outstanding loan balance, he warns.
• If repair costs are too high, replace the car
If repair costs are more than half the current market value of your car, or if repair costs start to overtake the monthly payments on your car, it’s time to replace it, says Ms Musa. Costs start to “hurtle” as your vehicle ages — it’s great to spend only a few hundred dirhams on upkeep, but not if you’re shelling out considerable amounts on major mechanical repairs.
Saving and investing
• Build an emergency fund to cover three to six months of living expenses
Start an emergency fund with just Dh500-Dh1,000, says Mr Phan, while Mr Cronin says you should then continue to build it to three to six months of all living expenses. He says you should also save for any major expenses coming in the next five years, such as a house deposit or university fees.
• Increase your savings by 1 per cent per month
This is key, says Mr Phan, if you are trying to improve your personal finances. “This is much more manageable than trying to cut out everything right away," he adds. "Like crash dieting, it’s simply not sustainable.”
• Try to save at least 15 per cent of your income for retirement
You are aiming to replace about 70 per cent of your pre-retirement income, once you give up work. But investing more than 15 per cent or “as much as you can”, in just a couple of globally diversified passive stocks and bond funds will build “true wealth over time”, says Mr Cronin.
• Follow the rule of 72
Divide 72 by your expected annual rate of return to estimate how many years it will take for an initial investment to double. For an investment with a fixed rate of 6 per cent, for example, the investment replicates in 12 years. Ms Musa says this is a good way to understand how compound interest works, where interest is applied to interest, and to roughly calculate and compare investments and their potential.
Achieving financial freedom
• Adopt the 4 per cent rule
Financial independence is achieved when savings are at least 25 times your annual expenses, thanks to the 4 per cent rule. This means you only take out 4 per cent per year (known as the safe withdrawal rate, or SWR, in the financial independence community) when you eventually start drawing down your retirement funds. Mr Phan says you can also calculate it as 300 times your monthly expenses. And he says always add “one more year”. “When you’ve reached your number, simply work one more year,” he says.
This stops people moving the financial goalposts higher and higher, he says, but also reduces any risk of your money running out using the 4 per cent safe withdrawal rate for life.