Your Money blog: Financial fitness plan for UAE expats – part two

In the second of a three-part series on financial fitness, we detail the next three steps UAE expats need to take to develop a healthier relationship with their money.

Not all debt is ‘bad’ debt with interest rates as low as they are today. Getty Images

Managing your money is harder than many realise.

From keeping track of your spending to setting aside some cash for saving and investment and keeping a lid on debt, it can be a difficult task keeping your finances balanced.

This is something highlighted by The National's campaign to help UAE residents tackle mounting personal liabilities. In recent months, the Business and Money sections have published a series of articles on the worrying levels of personal debt in the UAE.

So to help UAE residents develop a healthier relationship with their financial affairs, we have teamed up with Sarah Lord, the managing director of Killik Chartered Financial Planners.

She has written a new guide – Financial fitness for expats: New wealth planning guide to help get in shape – which we are now sharing in three parts.

In part one, we looked at how expats should work out their net worth, start budgeting and create an emergency fund.

__________

Financial fitness

■ Read part one of the financial fitness plan for UAE expats

■ Read part three of the financial fitness plan for UAE expats

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Here, in the second instalment, we share the next few steps of Ms Lord’s plan, which aims to help expats living in the UAE manage their hard-earned dirhams more effectively:

4. Clear expensive debt

For most of us, a life spent avoiding debt would mean not attending university, driving a car or owning the roof over our heads.

Besides, not all debt is “bad” debt with interest rates as low as they are today. If, for example, you are paying a low rate to service your mortgage and/or your lender will impose penalties for overpayment, then clearing a chunk of your home loan may not be the best use of any surplus cash. So here is a two-stage plan of attack;

• Identify and clear expensive “bad” debt as soon as you can. This includes store card debt, credit card debt, unauthorised bank overdrafts and any other expensive unsecured loans (eg to pay for a car). The annual percentage rate (APR) can be high and the moment you miss a repayment you may get walloped for interest. Since interest charges can reach 20 to 30 per cent plus per annum, it makes sense to prioritise clearing this type of debt.

• Review your mortgage. This can be considered “good” debt because, being secured on your home, the interest rate should be relatively low. That said, if you don’t keep up the repayments you do put your home at risk. So:

- Regularly review your mortgage deal to ensure it remains competitive. Watch out for a rate change when you come to the end of any introductory offer period.

- If you can afford to, by all means overpay your mortgage. However, your mortgage provider may restrict, or penalise, overpayments and you should set up an emergency fund first before you do that.

5. Set up your financial lifetime goals

Your mission (which I hope you will choose to accept) is to identify your major life goals so that you can determine when you will need to pay for them and how you will ensure you have the funds to do so. These goals are personal to you. For someone in their 30s or 40s, some typical key milestones might include:

• Buying a first home

• Nursery and school start dates for children

• Car upgrades/replacements

• Property extensions/improvements

• Major holidays and trips

• Retirement (even if this seems some way off)

The next step is to project future income and costs to decide whether you can afford to fund these goals. A decent cash flow model is essential here. The result may be a pleasant surprise (perhaps an opportunity to stop working sooner than they expect) or the opposite.

6. Design your investing strategy

Step five will have made you consider your financial priorities, so you should now have a feel for when the larger cash outflows are likely to hit you and how much money is involved. The next step is to set yourself up with an investment strategy that will deliver the right amounts at the right time. As a friend once quipped, there are only five ways most people ever make money;

1 Work for it (salary from an employer or income from a business)

2 Marry it (but, as the saying goes, “if you marry for money, you’ll end up working for it”)

3 Inherit it (with little certainty about either the amount or the timing)

4 Win it (a high-risk strategy)

5 Earn it (from successful investing and harnessing the power of compounding)

Options 1 and 5 are clearly where we should be focusing our efforts. So where to start? Here are a few guidelines;

- Timing:

A key question when it comes to investing is “when do I need the money back”?

• Quickly – within five years. This sort of “short call” money needs to be somewhere safe and relatively low risk. Cash, or perhaps short-dated securities, are good options

• Over the medium term – five to 10 years. The bulk of your portfolio should be kept in relatively low-risk securities but with say a seven to 10-year horizon you may also choose to invest in shares

• Longer term. Lifetime savings should be put to work in the stock market to earn a decent return. The Barclays Equity Gilt Study for 2015, for example, shows that equities have offered a post-inflation average annual return over the past 50 years of nearly 6 per cent, beating both fixed income securities (under 3 per cent) and cash (1.5 per cent).

- Risk appetite:

Some of us are risk-takers while others are risk-averse. An adviser can help you to set up a strategy that takes account of both your risk appetite and the need to achieve your lifetime goals. When you are young (and given that girls born today are expected to live to 100 on average, if you are reading this in your 30s or 40s you are still young) you should be aiming for decent returns and accepting some short-term volatility by investing substantially in equities. Your strategy doesn’t need to be complicated – you may start off with a simple monthly investment plan.

- Knowledge, aptitude and time

Investing takes time and effort, not something everyone is prepared, or able, to commit to. So you may want to bring in someone to help you set targets, allocate your funds appropriately and advise you as your circumstances change.

In part three, Sarah Lord reveals how to become a savvy saver, sort out your paperwork and how to take care of your family.

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