x Abu Dhabi, UAEWednesday 24 January 2018

Dusting off financial prudence

Being wise with your money never really went out of fashion, but as consumer confidence drops, it is becoming a necessity.

Being wise with your money never really went out of fashion, but as consumer confidence drops in the region, it is becoming a necessity for growing numbers of people. When I was a child in the UK, I remember my father lighting a fire each schoolday morning to save on our central heating bill. My siblings and I would run downstairs and shiver as we dressed for school in front of the crackling flames. We always had a nice house, but were frugal with other things. We kept a black-and-white TV for years instead of splashing out on a new colour model; as a result, I was genuinely surprised when I learned that the Incredible Hulk was green.

Many today would call this behaviour Draconian, which is a testament to how much better off much of the world has become, economically, in the past few decades. We drive nicer cars, many of us own multiple properties and we eat better food. We've never had it so good. But if our finances are in for lean times should we just drop our shoulders and give in to the gloomy, hopeless view of life painted by some of the world's press? Of course not. We've all lived through recessions before, and we likely will again.

If this is part of a simple economic cycle how do we minimise the pain? Is this an opportunity for the coolheaded, or do we hole up in a financial fallout shelter until the good portion of the cycle comes around? My simple answer is that the current downturn will affect us all in the short term, but it shouldn't change our long-term plans - if we've planned well. If things are going to get tough, then this should feel like a slight adjustment to our finances for the next few years, rather than a major rethink. Obviously, some people are going to be affected more than others, such as those who have stretched their financial position too far in search of big, fast returns. The key for everyone now is to call upon a phrase not heard for a long time: Financial Prudence.

We live in a country where mall-walking and decadent, non-essential shopping have become habits, where driving enormous automobiles is the norm, so this phrase is going to require a little dusting off before it gets popular again. I'm here to begin that dusting process for you. The truth is that this phrase has never been out of fashion with those sensible folks who quietly improve their financial positions year after year, no matter what is going on in the world. You probably know someone like this, a friend who never takes the same number of extravagant holidays as everyone else, even when the going's good, but who also never cancels his holidays when times are hard. These people know what they can afford, and don't overspend or buy things they can do without.

It is also likely that they have an overall financial plan, which allows them to think of their long-term position, as well as the next few weeks and months. Financial Prudence can be applied in several areas to make life easier for you. The most appropriate area is also the most obvious to look at, and that is what you are spending your money on daily, weekly and monthly. Do you really need all of those things? Is there a way of buying a similar item but spending less money on it? Can you delay the purchase until next month, or beyond? Should you simply not buy it at all?

Many people will use a budget to measure all their outgoings in a typical month, and set a limit to their spending. How much cash do you keep in the bank, and is it enough? If you lost your job tomorrow, would you be able to survive for three months off of your bank account while you assessed your options? If you are an expatriate, is all your money kept in a local bank, or do you keep an offshore account?

Getting to grips with your short-term cash position is the financial priority for everyone, no matter how much you earn and spend, and it is the most effective way to start navigating the righteous waters of Financial Prudence. A good short-term cash position sets you up for every other part of your financial life. The next area to focus on is debt, which I describe in two ways: good and bad. An example of good debt is a car loan, which allows you to spread the cost of a necessary asset over a series of payments and leaves you with the asset on completion.

An example of bad debt is a big credit card bill, one that doesn't get paid off in full each month but just sits there and forces you to pay a huge amount of interest. This is the most expensive way to borrow money, and is definitely a bad use of debt. Living in your prudent manner, you will want to get rid of bad debt and use good debt to manage yourself. This is what the sensible folks do to control their finances, and it almsot always rewards them over time.

Please do not think that Financial Prudence leaves no room for savings and investments: the opposite is true. A big part of being good with your money is putting a little bit away for future needs, and there are always, without exception, future needs. The mistake that most people make in this area is jumping into action without first getting the other bits right. For example, if stock markets around the world drop by 30 per cent and you have some money invested, have you lost anything? If you were planning on leaving the money in for only 12 months and you don't have enough money in your bank account right now, then you're likely to sell the shares, so the answer is yes. Financial Prudence in this area tells us to invest money only when you can afford to, and for a sensible period of time.

Let's be clear about how this works: I'm not suggesting we all change to the smallest and most fuel-efficient cars available, but I am suggesting that we don't need quite as many Hummers or Range Rovers. A meal in a nice restaurant is a lovely way to treat yourseld, but it is a treat, rather than a weekly fixture. Live this way all the time, not just in the bad times, and you will soon be regarded as one of the sensible crowd.

Stuart Birch is a financial consultant with Acuma Wealth Management in Dubai. He can be reached at sbirch@acuma.ae