According to the Journal of Psychology over 50% of people set new year’s resolutions and the reason for failing them is that we set unrealistic goals for ourselves, meaning it’s too easy to throw in the towel when the mountain seems too big to climb.
My first piece of advice would be that this new year, you set just one goal for yourself and subsequent smaller goals to reach it, that way you have a much higher success rate. My second piece of advice is make that goal organising your finances.
Now I may be biased, but it is no secret that 2018 in the UAE will be a tougher climate than its predecessor. According to figures from PayFort, nearly half of the population is in debt and 28% of us are failing to save at all, and with the introduction of the 5% VAT on most goods and services, the cost of living will ultimately be higher. However, this need not be an issue, if you are money savvy and set the groundwork early. By putting systems in place from the start and sticking to them over the long term, 2018 can be the year when you have greater financial freedom, now and forever.
But where do I start? I hear you cry. What do I prioritise? It’s a great question and a tough one to answer. Debt, short-term savings, pensions, school fees - they are all priorities and one shouldn’t be favoured over the other. But with a few simple steps, you’ll be climbing that mountain in no time.
1. Know your spending habits
You can’t start saving until you know exactly what you are spending your money on so the first thing to do is write down your expenditures or use apps such as Mint to track. Split your expenditures into bills and everything else so you can see which areas you can realistically cut back on.
2. Make spending relative to your earnings
As an expat, it is often easy to get carried away with living an extravagant lifestyle with your higher earnings. However, it is important to make your spending’s relative to what you are bringing in. For instance, ask yourself - do you need to live in the most expensive area of town? Do you need to buy a brand-new car, or will one a couple years old with a full-service history do? No-one wants to spend most of their wages on rent and car loans.
3. Clear bad debt
There are two types of debt - good debt such as mortgages and bad debt such as credit cards. Make it a priority to clear bad debt as soon as possible to avoid paying high amounts of interest over a long period of time. First, pay the debts that incur higher interest rates and get rid of them quickly. But also, be smart about it; for example, if you had a crazy month and spent too much on your credit card, sometimes it is worse to pay the minimum amount than to just negotiate the full payment in instalments with the bank. You can also try consolidating them in a single loan as banks often offer a better interest rates on a promotional basis - this will help you organise your finances and make it easier by just making one larger payment each month, but be careful with charges. Always check your options! The money saved by paying debts can quickly be put towards savings funds that work for you.
4. Have a rainy-day fund
Your rainy-day fund should be at least two times your monthly salary and it is crucial to have it as an expat. In case you lose your job or get sick, this is your money to survive this time as unlike home countries, there is no state benefit to help you out. It is important to remember that this money should be very liquid, so maybe keep it part in cash in your house and part in your savings account. Don`t worry too much about getting interest on it. Additionally, if your rainy-day fund isn’t what it should be or even if it is, it’s very important to have life/critical illness insurance to cover you and your family through tough times.
5. Make a savings plan
Once you have cleared bad debt, I recommend saving at least 25% of your salary as it's not just one thing you are saving for. For instance, one part may need to go towards a pension, another to children’s education or perhaps a house deposit. Looking at a list can be daunting, but once a set plan is in place it makes it much easier. When receiving any gratuities or bonuses, put them straight into your savings plan. Gratuities should essentially be seen as a pensions contribution in this area of the world so don’t be tempted to spend it at the end of your employment. Instead, put any cash bonuses straight into a savings scheme so you won’t be tempted to spend. Once you have your plan it’s important to make your money work for you because if it doesn’t, you will have to work longer. Here, you must get an interest aligned with your risk profile and life goals and there are many different options available, from equities to bonds etc. Talk to an expert about this to avoid any bad investments.
To conclude, for expats who are generally at a higher paying job and tax-free income, it’s important not to waste the opportunity and save as much as you can whilst you can.
With thanks to Tyla Phillips, Chartered Financial Advisor, Guardian Wealth Management.