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Rising inflation, higher interest rates and the economic uncertainty caused by the Covid-19 pandemic has put the spotlight on the financial well-being of millions of people around the world.
However, overcoming financial fragility can be difficult for some, while others have found creative ways to bounce back by reining in their spending and paying off expensive debt, allowing them start their savings journey and create a safety net.
With record-high inflation in many parts of the world, it has never been more important to focus on protecting our financial futures by setting up emergency funds, paying down debts, contributing to regular savings plans and investing for our retirement.
Why is everything getting so expensive?
A 2020 survey by Mercer found that 45 per cent of foreign employees in the UAE either had no means of maintaining a decent standard of living in their retirement, or plan to work beyond retirement age to financially support themselves in their golden years.
Meanwhile, a lack of financial awareness was also an issue among respondents to the Mercer survey, with 61 per cent saying they had no long-term savings.
But where do you begin?
“I would suggest having clarity on your financial situation first,” says Carol Glynn, founder of Conscious Finance Coaching.
“Getting this clarity is crucial as it will show you your financial habits and mindset. It will highlight areas you can change to improve your situation.”
We asked financial experts to outline the key steps that can help you to turn your finances around and protect you against the rising cost of living.
1. Change your mindset
The first step in turning your financial life around is admitting to yourself — and those closest to you — that you are not where you want to be financially, according to financial independence coach Steve Cronin, founder of DeadSimpleSaving.com.
“You are going to have to do things differently and take responsibility for improving your own situation; blaming others isn't going to cut it,” he says.
It is important that you try to understand how you ended up where you are by looking at your successes and mistakes, bad money habits and beliefs about money.
“Did you inherit these from your family? If you are ‘not good with money’ or too busy or too much of a spender or life here is too expensive or you are afraid of taking risks … realise these are excuses,” Mr Cronin says.
“From now on, you will be good with money — tell yourself this every day in the mirror if you have to. Educate yourself about financial independence: read, listen, watch and learn.”
Also key to changing your mindset is thinking about why you want to improve your finances and what will motivate you to do that, Mr Cronin says.
Questions to ask yourself include: will you be less stressed and what could your life be like if you can grow an investment portfolio to secure an amazing future?
“Visualise it. Being endlessly disciplined is too hard — you need to be more excited about your future than about spending money right now on unnecessary stuff.”
2. Figure out where you are
This step is one of the most difficult because it is about being honest to gain clarity about your finances, helping you to start turning your situation around.
“You need to take your head out of the sand and attach some numbers to your life,” Mr Cronin says. “With a few basic metrics, you can establish where you are now, where you need to get to and how to get there.”
To do this, you need to first calculate your net worth: assets (what you own) and liabilities (what you owe to others), as well as weighing up how much you earn and your daily expenses.
“Analysing your expenses is crucial,” says Ms Glynn. “Make sure to do it with a fact-finding approach — don't rely on estimates or your memory because we forget a lot of transactions we make as we are very good at ignoring certain information when it comes to money.”
3. Set financial goals
For some, it can be difficult to think about long-term financial goals but it is an important step on the path to securing your financial future.
“Don’t spend ages worrying about goal-setting or diving into the details,” Mr Cronin says.
“You have the rest of your life to refine your goals. But don’t skip this step either. You need to know where you are going, no matter how bad your current situation is.”
If retirement is your goal, you will need to consider what percentage of it will be derived from stock investments, a buy-to-let property or even a pension, for example.
“This will help you estimate a net worth target and where all that worth will come from,” Mr Cronin says.
Shorter-term goals include improving both your net worth and monthly savings rate.
“You can see the levers you have to play with: investing in index funds or buy-to-let real estate that will grow your assets, paying off expensive debt, boosting your family’s income and reducing expenses,” Mr Cronin says.
4. Increase your monthly savings rate
There are numerous ways to creatively boost how much you save every month.
This could include increasing your income with a side hustle and reducing your monthly expenses, says Mr Cronin.
“Even while job security is unpredictable, it is never been easier to earn a bit of extra money if you get creative about it,” he says.
However, controlling your expenses is important and “part of being an adult, even if it is not much fun”, Mr Cronin says.
“The worse your situation is, the more detailed you have to be.”
One popular way to reduce expenses and boost savings is to use the 50:30:20 rule, says Ms Glynn.
This allocates 50 per cent of your income to needs that include rent, utilities and groceries, 30 per cent to your wants such as entertainment, holidays and eating out and 20 per cent for savings and paying off debt.
“This is my favourite method as it is a good guideline to get you started and you can build from there,” says Ms Glynn.
You could also try making a list of 10 things you can do to reduce your expenses in the next month by a specific amount, Mr Cronin says.
“Make it realistic but also in line with your circumstances — if you have major debt problems you will have to be very tough on yourself for a while.”
5. Be creative to beat rising inflation
As the cost of living is rising fast on the back of high inflation, Mr Cronin suggests using “every trick in the book” to save money.
“Shamelessly use two-for-one deals, discount days, shun expensive supermarkets and clothes shops, admit whether you really need that extra bedroom or not and absorb saving tips on social media,” he says.
“Do not try to keep up appearances if your finances are collapsing — be honest with yourself and others, and get your family on-board to help generate money-saving ideas.”
You can also stay motivated by having an accountability partner who can help you to stay committed to your financial goals.
By tracking and revealing your savings rate to your accountability partner each month, it will be clear if you are making progress or not, Mr Cronin says.
Meanwhile, many people are often forced to make different choices during periods of high inflation to ensure they are still achieving their life goals, says Ms Glynn.
This could be anything from switching to more cost-effective supermarkets to looking at alternative ways to travel to work to save on fuel costs.
“It may be that you need to start looking at ways to subsidise your income to cover the difference,” she says.
“My biggest priority would be just getting clarity on where exactly your money is going. What is becoming more expensive and are there ways that you can be more intentional and control your costs while not changing your lifestyle?”
6. Pay off expensive debt
Not all debt is bad, but if you are paying more than a reducing rate of 5 per cent interest per year, you should aim to pay it off faster rather than investing your money, according to Mr Cronin.
However, he says that if you cannot pay off your credit card debt in full each month, then you are in a “very serious situation”.
“Your whole life must focus on getting the balance down and you will have to look carefully at ways to hack your expenses. Happiness will have to wait until your card is paid off. Project your cash in and out every day for the coming month if money is very tight, so you know when you will hit a problem; then you can do something about it in advance.”
Credit card debt is like financial quicksand as annual interest rates in the UAE can reach as high as 42 per cent, says Ms Glynn.
“The interest rates and penalties on credit card debt are very high and there is a high percentage of individuals who don't understand that, so it can be really demoralising.”
7. Build a financial safety net
The importance of saving for an emergency fund that equals three to six months of expenses is another important step in turning your finances around.
“Having an emergency fund is my only 'should' in personal finance,” says Ms Glynn.
“On a practical level, it means that you are essentially recession-proofing yourself so you are not reliant on loans or credit cards when you face unexpected costs such as car maintenance or a surprise trip home.
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“But it is also peace of mind because I have seen first-hand the incredible shift in people's stress levels, their habits and their behaviour when they have an emergency fund in place — they feel safer, have freedom and choices. The impact of that on their daily lives can be huge.”
Mr Cronin agrees. “A cash buffer is the most important part of your financial life,” he says.
“You need to build a buffer the size of six months’ total expenses. That way, if you lose your job, you can carry on paying all your bills until you find a job you actually like. Your money will stretch out to at least nine months if you are careful.”
8. Invest for an amazing future
Now it is time to begin learning about investing and how to do it yourself rather than relying on financial advisers who charge high commissions by selling unsuspecting people expensive long-term savings plans, complex insurance contracts or get-rich-quick schemes, Mr Cronin says.
If you can spare it, set aside $1,000 to learn how to invest sensibly. When you have your expensive debt paid off and your emergency fund in place, this knowledge will help you to start investing at full speed, he says.
“Even if you love property, you owe it to your future self to learn how to invest in stock index funds via a brokerage or robo-adviser. It is the fastest proven way to grow your money over the long term.”
Finally, it is important not to be stuck on any of these steps as you work towards securing your financial future.
“They form a circle, not a straight line,” Mr Cronin says.
“Make some quick progress at each step and then go around again to improve each area of your finances. You will be amazed by how much progress you can make with an understanding of where you are now, where you need to get to and why, then how you are going to do it.”
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