Last month’s article looked at interest rates, and how they can affect the cost of borrowing. Saving money is an equally important part of financial planning, and small changes can have big positive impacts on your personal financial situation.
However, before putting money aside it is useful to have an audit of your own financial situation, and to assess the position that you currently find yourself in.
The first step is to calculate how much money is owed — overdraft, loans, credit cards — and then consider consolidating payments into one. Repayments need to be affordable, so it is important to calculate a realistic repayment plan, and it can be a good idea to get professional advice at this stage.
Once this area of your personal finances are sorted out, you can begin to think about ways you may be able to cut back on spending and then save for the future.
1. Keep track of spending
First of all, it’s important to list all major monthly outgoings: mortgage repayments/rent, utility bills, groceries, insurance and any regular debt repayments. Consider putting a bowl in the kitchen and putting every receipt you get, even for the most minor of items to get a true indication of what you spend your money on each month — you may be shocked by this!
It is often the little things that can add up — the daily coffee, lunch and snacks during the day. Once you see how much these seemingly small things actually cost, you may think twice about buying a coffee and muffin each day which could easily add up to Dh600 over a month.
2. Ensure you have a savings fund for emergencies
Air conditioning not working or a broken-down car can prove costly to fix and it is important to have access to funds that you can get your hands on quickly should something like this happen. As a rule, you should try to put away a sufficient amount to cover three months’ worth of expenses; enough to cover all bills.
3. Pick the right savings account
It’s important to pick the right kind of savings account. An instant access savings account is the best place for the emergency fund, but for money above and beyond this, it is worth finding an account that will earn you more interest. A negative of the low interest environment that we are currently in, is that interest rates on savings are also very low.
Once you managed to save this money, you can then consider putting savings aside for other things such as moving house or a college fund for your children.
4. Longer term savings
Once the basics are in place, you can then start to plan for the future. While your retirement or your children’s university costs might seem a long way off, if you haven’t planned, they will arrive far quicker than you expected, and could leave you in a difficult financial position. If you consider that 10 years equates to only 120 pay cheques, it really does not leave long to build up that nest egg to keep you in a comfortable standard of living when you retire.
Identifying a particular product suitable for your needs involves a more detailed discussion than the overview provided here, but some points to consider are listed below.
Firstly you will need to decide how much you can afford to save and for how long. Then you can consider where to invest and your attitude to risk.
I would always recommend meeting with a qualified adviser to run through your financial situation to assist with planning to match your needs and requirements as closely as possible.
— The writer is the Regional Director at Acuma Independent Financial Advice
