x Abu Dhabi, UAE Thursday 20 July 2017

Experts disagree on the order of financial priorities

Having extra cash left over at the end of the month should be viewed as an opportunity to work on long-term goals. But it is the order of those plans that is open for debate.

A saver’s personal situation will dictate what their financial priorities are, as well as help them to decide on their savings goals , experts say.  iStockphoto
A saver’s personal situation will dictate what their financial priorities are, as well as help them to decide on their savings goals , experts say. iStockphoto

In this weak global economy, the thought of having a spare Dh1,500 every month may seem like a pipe dream. Still, those who are lucky enough to be in that situation face the dilemma of what to do with the cash. The wrong answer is obvious: blow it on a fancy holiday or buy lots of new clothing. The right answer, however, is not as clear.

There so many demands: from paying off old credit-card bills to setting aside money for airfares for the next visit home, saving for your children's university tuition and investing for retirement. Expatriates may have had a savings budget back home, but should the priorities be the same when they are working abroad? And does long-term planning make sense for a person who may be posted to the Emirates for only a few years?

Of course, people need to make decisions based on their individual situations, taking into account their age, income, marital status, health, country of origin and number of children, if any. But as a general rule, financial advisers recommend a combination of filling in gaps that company benefits don't provide - which are often substantial - while also planning ahead.

"Employee benefits in the UAE are very much subject to what is needed by someone to live a healthy life whilst they are here, rather than help with the future," says Caroline Dredge, an Abu Dhabi-based wealth manager and assistant vice president at GlobalEye, the financial services firm.

Keren Bobker, an independent financial adviser with Holborn Assets in Dubai and the On Your Side columnist for Personal Finance, adds: "The days of most people having 'featherbed' contracts that include housing and a bunch of other allowances are gone."

The first priority, many experts say, should be to pay off high-interest debt, such as credit-card bills.

That's a particular concern in the Emirates, where rates are often above 30 per cent. There is probably no trade-off that could make up for that drain - no alternative use to which that money could be put that could possibly earn a better rate. Ms Bobker also points out that "the amount of personal debt that many people carry here is far too high".

But the main reason to clear the debt is that in the UAE, the penalties for falling behind are potentially dire. "At the time of getting the loan, the bank would ask the borrower to sign a number of undated cheques for the amount outstanding," says Domluke Da Silva, the chief operating officer at Arabia-Asia Capital Alliance, an investment advisory firm in Dubai. "It's understood by both parties."

If the borrower loses his job and begins to miss loan repayments, the bank may then cash those cheques. And if a cheque bounces, the borrower may well be sent to jail.

"It would be best to try and get out of it as quickly as possible," Mr Da Silva says.

However, there can be a problem with moving too quickly. According to Mr Da Silva, many lenders charge "pre-settlement" fees of between 1 per cent and 4 per cent if you want to pay off a loan early. Even so, he says, compared with an interest rate that could be 10 times that amount plus the jail threat, "you're better off getting rid of the loan and the potential risk".

Ms Bobker, however, puts debt repayment as her third priority.

"Paying off debt is important," she says. "But you have to consider what could affect you right now - and that is health issues and death."

She considers it more important to establish an emergency fund and many other advisers agree that this should rank high on anyone's list. Typically, they say the fund should consist of two to six months' salary.

Although the main purpose is to cover living expenses in case of losing a job, the safety cushion can certainly be used for any urgent need. "What if there's some kind of family emergency back home and suddenly you have to buy a plane ticket on short notice?" says Stuart Ritter, a certified financial planner with T Rowe Price, a mutual fund company in Maryland, in the US.

The third-most cited priority is probably insurance to supplement whatever is provided on the job. This includes medical insurance and, for those who have children or other dependents, life assurance.

After these three goals, there is less agreement between the advisers.

A number of experts rank saving for retirement next. Although a few employers in the UAE are creating retirement investment pools and the Dubai Department of Economic Development has proposed a private pension scheme, a genuine retirement system is not widespread here. As for the standard end-of-service gratuity, Ms Dredge says it is "rarely sufficient".

The advantage of saving now for a retirement decades in the future is that a small amount of money has time to grow into a large nest egg. "If you can set aside as a minimum 10 to 20 per cent of salary to long-term planning, it's going to build up over time," Mr Da Silva says.

Other advisers, however, warn that people need to focus on more immediate needs. Craig Holding, the associate director of Acuma Wealth Management in Abu Dhabi, combines saving for retirement with "short-term goals", such as holidays, under the rubric of "save money for the future". Ms Dredge recommends putting aside money each month for what she calls annual "bulk costs", such as car insurance. But Mr Da Silva says such expenditures are too small to be part of financial planning.

Perhaps the most spirited debate involves whether expats should be saving to purchase a home - and if so, where. Mr Da Silva is a big fan of home buying and, in fact, he considers it potentially part of a person's retirement investment portfolio, along with "a diversified mix of bonds and equities and alternative investments".

As he puts it, "typically and hopefully, the value of your house will increase over the long period of time". His main caveat is not to "speculate" on multiple properties.

What happens when the owner is ready to leave the Emirates? "There are a lot of people who would buy your property," he asserts.

Ms Dredge is far less sanguine. She says property values have dropped dramatically in the UAE since their peak in mid-2008 and warns of two factors that could hurt values again: oversupply and "a security situation in the Middle East". Instead, she recommends saving for the "purchase of a property to return to" in the home country.

Meanwhile, Mr Holding takes a middle path. "If you can plan to be here for seven years and you have the deposit ready to go, that would be an ideal time horizon" for buying a home in the Emirates, he says. Alternatively, "if you want flexibility and still want an investment, we would advise clients to look at places like Malaysia, London, San Francisco and even New York City".

Mr Ritter says debt repayment, an emergency fund, insurance and a retirement account are equally important and should be done simultaneously, although perhaps not in equal dirham amounts.

"If people say, 'I'll make getting out of debt my priority and then save for retirement', that can take three years," he says. Then, by the time the debt is settled, "they haven't been thinking about retirement. So they'll say, 'I have more money to spend now'."

Priorities will certainly vary according to the saver's personal situation. Parents with young children, for instance, may want to put more money into life assurance and less into a university fund, gradually shifting as the birthdays advance. "For most people, the need [for life assurance] to replace their income for dependents usually goes away around their mid-50s," Mr Ritter says.

To illustrate the variables, Ms Dredge offers two examples.

A 25-year-old unmarried, mid-level female manager at an engineering firm should first get coverage for critical illness, then clear off her debts and establish an emergency fund. Only after she has met those goals should she save for retirement and a home purchase.

In other words, she has plenty of time before worrying about long-term goals and no need for a big home for a growing family, so her most urgent need is to "protect her financial independence".

By contrast, a 40-year-old male doctor, married to a teacher, should have life assurance and critical illness coverage, an emergency fund, retirement savings, education planning for any children and, finally, clear off the mortgage. In this case, the physician has dependents to take care of.

Despite these inevitable differences, experts also say that some commonsense behaviour should be universal. Mr Ritter would give the same advice to someone working in the US or the UAE.

"Irrespective of your position in society," Mr Da Silva says, "if one has a planned and disciplined approach, whatever factors come in - market crises, the company collapses - they'll be able to avoid crises."

pf@thenational.ae