12 steps to financial solvency
For many the first few weeks of a new year are a period of reflection.
One of the biggest issues to dominate our minds at this time is our financial situation and taking good care of your money could be more important than ever in 2017, which looks set to be a turbulent year.
So summon up all your self-discipline and get your financial house in order with this 12-step strategy:
1 Tidy up your paperwork
Pull together details of all your bank statements, savings accounts, investment plans and insurance policies and make sure you have your money in the right place.
Do you have large sums sitting in a current account earning zero interest, when that money could be working harder elsewhere? Have you lost track of any old bank accounts or pension pots? Have you written or updated your will lately? Now is the time to find out.
2 Keep a budget
Start by drawing up a list of all your regular monthly expenses to see where the money is going and whether you can make cutbacks. Are you spending more than you are likely to earn each month? Are you frittering cash in the malls or spending too much on late nights out?
Sam Instone, the chief executive at Dubai-based advisers AES International, says it is nearly always possible to cut your spending. “Most people build their wealth through years of hard work, perseverance, planning and most of all, self-discipline. Do those words apply to you?”
3 Plan ahead
Ambareen Musa, the founder and chief executive of comparison site Souqalmal.com, says you should decide your financial goals first and then work out what steps you must take to get there. “Plan for major expenses such as moving house, holidays and travel spends, a new car and so on well in advance. If you spread the cost throughout the year, you won’t get hit with them all at the same time.”
4 Prepare for a rainy day
2016 was a year full of political shocks, and 2017 could prove just as troubled, as the era of near-zero interest rates and inflation draws to a close.
The US Federal Reserve finally increased interest rates in December and may hike them three times more in 2017, while president-elect Donald Trump’s proposed trillion-dollar reflation blitz signals an end to the age of austerity.
You also need to protect yourself against any personal swings in fortune such as losing your job, rising mortgage rates or a property crash.
A safety net is vital in uncertain times, says Ms Musa at Souqalmal. “Could you really manage if you were faced with a sudden cash crunch? Building an emergency savings pot to help you out in difficult times is vital.”
You should have at least three to six months’ worth of cash kept aside for a rainy day, ideally in an instant access savings account, she adds. “The money should be kept on easy access, so you can get to it in a hurry. The interest rates may be lower but the cash is there when you need it,” Ms Musa explains.
5 Pay down debts
You will be in better shape to withstand any shocks if you take control of your debts sooner rather than later.
Running up large personal debts on expensive short-term lending such as a credit card means throwing money away on exorbitant interest every month. A card charging a monthly annual percentage rate of 2.99 per cent is actually costing you a hefty 42.4 per cent a year when the interest rate is compounded.
Personal loan and credit card debt is not something you should run up lightly, so tackle yours before it spirals out of control, Ms Musa says. “The new year is the perfect time to start sorting out the mess.”
She recommends setting a target for the amount of debt you wish to pay off this year. “Rank your debts according to the rate they charge and pay down the most expensive first. Then move on to the next most expensive while maintaining the minimum monthly payments on all of them.
“This method is called debt stacking – or sometimes snowballing – and helps reduce the overall amount of interest you pay and slow the pace at which it rolls up.”
Also, consider taking out a balance transfer credit card to give you a little breathing space. RAKBank’s Visa card, for example, charges zero interest for three months with a processing fee of 1.9 per cent, and a relatively competitive 2 per cent a month thereafter.
CBD charges zero interest for six months on balance transfers with a 1 per cent processing fee and 1.5 per cent a month on purchases.
6 Start saving now
Once you have your debts under control, start saving for the future.
Kunal Malani, the head of customer value management, retail banking and wealth management at HSBC, says if you want to enjoy a comfortable retirement, or fund your children’s education, you need to start setting aside regular amounts today.
“The benefits of starting early are many. As a hypothetical example, if you started investing US$1,250 a month at age 35 your savings could be worth $855,000 by age 60, with premiums totalling $375,000,” he says. “However, if you save the same amount from age 45, your total pot could be just $360,000 by age 60, with premiums totalling $225,000.”
Both calculations assume exactly the same annual compound interest growth of 5.7 per cent a year. Starting early provides a double benefit: you deposit more money into your savings and the funds have far longer to grow.
“The difference is evident as you can see, and shows why saving regularly and investing early produces results,” adds Mr Malani.
7 Take cover
As well as saving for the future, you must also guard against potential shocks along the way. “Events such as redundancy, critical illnesses, traumatic accidents and even early death can have a significant financial, as well as, an emotional effect,” says Mr Malani.
These are often unpredictable so you need to protect yourself with stand-alone life and critical illness cover, to protect your family should the worst happen, he adds.
8 Shop around
Are you sure you are getting the best possible deal on everyday financial products such as your credit cards, car loan, personal loan, currency transfer service, home, health and travel insurance? Now is the ideal time to find out.
Dig out your paperwork then head online to a comparison site such as Souqalmal.com, Compareit4me.com or MoneyCamel.com to see if you can get a better deal.
Do not always just go for the cheapest, but make sure they also give you the same – or superior – levels of cover and service.
9 Review your mortgage
If you own a property or two, your mortgage is likely to be your biggest monthly expense, so you need to keep it under control.
Record low interest rates have tempted many to take on large sums of debt either to invest in property or buy a place of their own, and this leaves them vulnerable to rising interest rates.
The process may have started with the US Federal Reserve increasing rates in December, with a further three rate hikes pencilled in for 2017.
Richard Bradstock, director and head of Middle East at real estate firm IP Global, says now is a good time to review your mortgage to see if you can get a better deal. “If you have a large mortgage and can reduce the long-term rate from, say, 4 per cent to 3 per cent, this could save you a major sum of money over the years.”
Before rushing to remortgage, check whether you will pay early redemption charges on your existing deal, this may wipe out many of your savings. “Also, beware of arrangement fees and other costs on your new deal, which can eat into the savings you make.”
Consider a long-term fixed-rate mortgage, as this could allow you to lock in today’s historically low levels and protect you from future rate hikes, he adds.
10 Get the investment balance right
Find out exactly where your money is invested, and work out whether it matches your goals.
Tom Stevenson, investment director for personal investing at Fidelity International, says 2017 looks set to be another year of uncertainty so it would be prudent to protect yourself against market volatility. “The best way to future-proof your portfolio is to place your eggs in several baskets. No one knows what lies ahead so diversify your holdings across a range of assets such as bonds, equities and property, spread around the world’s geographical regions.”
Investing is a long-term game so don’t be put off by short-term market jitters, Mr Stevenson adds. “While it might be tempting to jump ship when markets get choppy, it is usually a mistake. Time in the market matters much more than timing the market.”
If you are worried about putting a lump sum into today’s volatile markets, consider drip-feeding money instead. “Staying committed and spreading your investments over time helps to cushion your portfolio from stock market dips,” Mr Stevenson says.
11 Avoid getting ripped off
One of the biggest financial dangers that UAE residents face is being tricked into an overpriced investment plan by a commission hungry financial adviser.
Sam Instone of AES International says too many are paying into outdated investment schemes sold by banks or advisers, such as education plans, pensions or long-term contractual savings. “These tend to be expensive, inflexible and offer a poor range of investment funds.”
Deciding what to do if you have already locked into one of these plans is difficult, as cashing in early can trigger penalties and you could lose much of the money you invested. “A properly regulated adviser can analyse your plan’s charges and terms, and recommend what you should do with it. You could save hundreds of thousands of dirhams in some cases,” says Mr Instone, adding that new investors should shun contractual plan or high-charging insurance company investment policies.
A properly regulated independent financial adviser will recommend investment funds with low, transparent charges. “I particularly like exchange-traded funds (ETFs) or index-tracking funds from firms such as Vanguard, BlackRock’s iShares or Dimensional Fund Advisers,” Mr Instone says.
When examining your existing portfolio, look for the total expense ratio (TER) on any mutual funds or investment plans. High charges eat into your performance and make it hard to turn a profit. “Sadly, TERs of 5 per cent or more are commonplace in the UAE. You should aim for under 2 per cent while some ETFs charge as little as 0.5 per cent,” he says.
12 Reward yourself
Life should not be all work and no play, Mr Instone says. “Once you have taken control of your spending and debts and are investing say, 10 or 20 per cent of your income for the future, make sure you enjoy spending the rest of it. You need to have a bit of fun to reward yourself for all that self-discipline.”
Follow us on Twitter @TheNationalPF
Updated: January 6, 2017 04:00 AM