Paying a year’s rent or school fees upfront is an alien concept to many new arrivals to the UAE, and spending tens of thousands of dirhams before they have even begun to get settled is not very appealing. Yet some shrewd savers say there is a silver lining to the system, including discounts and advanced planning.
Anthony Schoombie, a 47-year-old South African IT consultant who moved to Dubai last year, says the system of upfront payments has its advantages.
“Car insurance, rent, school fees are paid for the year, so they’re kind of dealt with,” says Mr Schoombie. “The rest of your money, other than living expenses, is yours day to day. It’s simpler to manage.”
Rasheda Khatun Khan, a wealth and wellness planner and founder of Design Your Life, says renters have the “negotiating power” to cut a good deal when paying upfront, so it’s worth getting “ahead of the budgeting game”.
Some landlords will give 20 per cent off for one cheque and will offer a discount for paying in two cheques, rather than three or four, she says.
Most schools offer a discount for paying the full year upfront and an even greater "early bird" reduction. For example, some offer a 5 per cent discount if fees are paid by the end of June for the next year and 3 per cent if paid by end of August.
Ms Khan advises setting up a separate bank account and a standing order instruction for automatic transfers.
If you haven’t yet started such a saving system yet, and are already into a new year after paying rent, it’s not too late. “Start now. It just means you have to put a little more each month for this year,” Ms Khan says.
Paying upfront can be a challenge, though, if it means taking out expensive loans. David Oldekamp, a 42-year-old American librarian who has lived in Abu Dhabi for eight years, says not many people moving to the UAE have “that kind of cash on hand”.
“Having to take out upwards of Dh200,000 in loans, for a two- to three-bedroom apartment and school fees for kids, is insanity, particularly when none of us has guaranteed employment,” he adds. “The start-up cost for the UAE is extremely high and quite risky. This system is completely unfriendly to renters.”
Abhay Rajan is an Indian business manager for a petrochemicals firm who has lived in Dubai since 2010. Married with twin four-year-old daughters, he pays Dh65,000 per year for his family’s two-bedroom apartment in Abu Hail and Dh50,000 a year in school fees.
“It’s not a small amount,” says the 35-year-old. “I pay [my rent] in two cheques … instead of taking loans, it’s just simpler to ‘cash flow’ routine and expected expenses, to budget and save x amount on a monthly basis. I find it unbelievable that people would take loans to pay rent upfront.”
The rent amount would be Dh63,000 if Mr Rajan opted to pay in one cheque, but two cheques still gives a discount, as the price with four cheques would be Dh67,000. "I prefer the middle option as it's easier to manage for me," he says.
Mr Rajan deposits his savings each month into a Standard Chartered Bank XtraSaver account. “It pays only 2 per cent interest, but it’s insulated from volatility,” he says.
When he decided to move to Dubai as a bachelor from the US, Mr Rajan says he already knew about the country’s system so had saved up in advance and took a cheap one-bedroom apartment in Discovery Gardens for his first three years in the country. “Rent was quite cheap back then,” he says.
He advises anyone moving to the UAE to “live conservatively for a year” and to share rooms with someone rather than take a loan, then “gradually move up”.
The downside of paying upfront is that it is "like offering a series of interest-free loans to others," says Andrew Hallam, author of Millionaire Expat.
“The longer your money is in the stock market, the longer it’s working for you,” the former teacher, who saved $1 million by the age of 36, says. “But if large chunks of your investable money get delayed every year, because you’re giving interest-free loans to others, then you won’t be maximising your money’s potential.”
Paying an annual lump sum also takes more careful planning. Steve Cronin, the founder of DeadSimpleSaving.com, an independent community for financial education in the UAE, agrees, saying they can "mess with your cash flow and your stress levels".
Most people only start thinking about their rent the month before, he says, but large amounts “demand attention and planning” to avoid a last-minute panic — when the consequences of bouncing a cheque or missing a payment are “severe”.
Leaving all your money in the bank is an option some people prefer, so they “don’t have to worry where the rent money is”, he adds — but, without earning interest, it will just get “eaten by inflation over time”.
A “little spreadsheet plan” will help renters manage lump sums more easily, he advises, along with a lump sum account and a cash buffer of three to six months of total expenses.
“Part of this must include a contribution to your lump sum payments,” he adds. “So start by dividing the lump sum amount by 12, to get your monthly contribution, and add it to your other expenses when calculating the size of your cash buffer.” Then set up a high-interest savings account for lump sums, he says, with the saving “coming straight out of your income” every month.
Construction law attorney Jennifer Lincoln, 35, set up the non-profit community SimplyFI.org, but left the UAE two years ago and now lives in the US. She had to take out a loan to pay the Dh100,000 rent for a one-bedroom apartment in downtown Abu Dhabi when she arrived in 2012.
But thereafter she set up a budget and says upfront payments act like “receiving a rebate”. “If you record all your expenses and you have made an upfront housing payment, there will then be months when ‘housing’ is not recorded and one can tangibly see an increase in the savings rate,” she says.
Ms Lincoln says that recreating the upfront payment has been a “great bargaining tool” after repatriating. “The US is built on credit, and most providers expect you to use that credit,” she says. “Our upfront payment was unheard of in the US.”
Using a lump sum as leverage, she says that not only did she avoid paying a deposit, she also got a 34 per cent discount on a four-bedroom house in the Boston suburbs.