Two in five UAE residents saw their disposable income decrease last year, according to a February report by market research company YouGov.
It is a stark reminder of the unpredictability of life and how unexpected challenges can happen when we least expect them.
That is where your financial safety net comes in. Whether it is a sudden job loss or a pay cut for a career switch, having a solid financial foundation is key to navigating the twists and turns that are bound to happen.
1. Make a monthly budget
Don’t spend more than what you earn is one of the first rules of personal finance.
Setting a monthly budget is the first step towards building financial resilience.
When you have a budget and stick to it, you will have a clearer picture of how much you can spend without compromising your ability to navigate future challenges and bounce back from them.
To create a budget, calculate how much you spend in a single month on your needs (for example, food) and financial commitments (such as investment contributions or a mortgage).
Then see where you can cut back on “wants”, ensuring that you are prioritising saving over non-essential expenses.
The 50/30/20 rule is a guide for those who are starting out: Reserve 50 per cent of your income for day-to-day needs, 30 per cent for your wants and 20 per cent for savings, investments and debt repayments.
2. Prepare and expect the unexpected
So, now that you have a monthly savings plan, the question is: How much cash savings do you really need?
As a general rule of thumb, you should have an emergency fund that covers at least six months’ worth of expenses.
Your emergency fund is your safety net for any unexpected situations, ensuring you can meet these unforeseen expenses without reducing your monthly investment contributions or liquidating your assets.
Remember the budget you had? Look at your monthly expenditure and multiply it by six months – that is how much you should have in your emergency fund.
To make things easier, try using tools like online emergency fund calculators to estimate how much you need to put aside for a rainy day.
3. Build your emergency fund, day by day
Once you have a savings target, the next step is to make a plan to get there.
For example, let us say your goal is to save Dh100,000, and you already have Dh75,000 in cash savings.
If you can set aside Dh1,000 each month, you will take 25 months to build a solid financial safety net.
Eager to get your emergency fund up and running? Consider making broader lifestyle adjustments to reach your target faster.
Perhaps you could hold back on non-essential purchases during sales, or opt for home-cooked meals instead of dining out.
To keep yourself accountable and on track, consider creating a systematic savings plan.
A simple way to do this is to create a standing instruction that automatically sets aside a portion of your monthly income.
4. Where to keep your rainy funds
Of course, it is not merely about saving more – where you park this sum of cash matters, too.
First and foremost, you should keep your emergency fund somewhere safe and liquid. But that does not mean you should leave it in a low-yield savings account, locked in a safe or tucked under your pillow!
Low-risk, interest-earning cash management portfolios are some options that can help you earn more on your spare cash without taking unnecessary risks.
5. Keep calm, stay agile
Now that you have your safety net in place, here is one thing to remember: The money is there for a reason – to be put to good use. And it is not only for doomsday scenarios.
You might choose to dip into your savings to relocate to a new country for a dream job, or perhaps embark on an entrepreneurial venture.
The key is replenishing your emergency fund once you have drawn from it.
Re-evaluate your savings and investment plans – you might have to put some financial goals on hold while you build up your emergency fund again.
This way, you will always be ready for any curveballs (or opportunities) life throws your way.
A solid financial safety net can help you navigate stressful times with greater ease and confidence, ensuring that you stay firmly on the path to your long-term financial goals.
Joseph El Am is general manager for the Mena region at digital wealth manager StashAway