Why UAE expatriates should not keep all their cash in the bank

Dubai: Bianca Selma has more than Dh100,000 sitting in a bank account in Dubai that doesn’t offer any interest at all. The expatriate feels foolish just letting the money sit idly by.

She had worked so hard to build that money for five years and it frustrates her every time she remembers that the bank, after all this time, couldn't be bothered to give her a dirham in exchange for her "loyalty". And she feels like the longer she lets the money sit there, the more she loses.

“That’s all the money I have. When I started saving five years ago, I could buy a decent, tiny flat at a bustling city centre back home with Dh100,000. Now that I have exactly that amount, the value of the same property costs twice than it was five years ago,” she says.

“I need to wait another five years until I can raise Dh100,000  more and by then, the value of the flat would have multiplied. This is a useless exercise,” says the 31-year-old secretary from the Philippines. “I should move this idle cash and put it somewhere else where it can earn interest,” she says.

Selma has every reason to feel silly for not doing anything about her savings. But even if she transfers the money to an interest-bearing savings account, she will still be struggling to beat inflation.

Savings accounts in Dubai currently offer between 0.5 per cent and 1.5 per cent annual interest. “Essentially in UAE – and many other countries – inflation beats savings rate by a sizable margin and, hence, keeping cash actually deteriorates your wealth,” says Preeti Bhambri, founder of personal finance website MoneyCamel.com.

Other money experts put Selma’s predicament in much simpler terms. Andrew Prince is a financial planner at DeVere Acuma, a UAE-based wealth management firm. His calculations suggest that if Selma's money is stashed in a savings account that promises 1 per cent annual interest, it would be like storing water in a bucket that is leaking out.

“Let’s use simple arithmetic and some assumptions. The bank is giving you 1 per cent on your savings and therefore, Dh100,000 will earn you Dh1,000 interest or profit at the end of the year,” says Andrew Prince, financial planner at DeVere Acuma.

“Inflation in the UAE is 4 per cent, therefore every Dh100,000 of expenses you have goes up by Dh4,000 at the end of the year. In effect you are earning Dh1,000 and your bills are going up by Dh4,000, which means each year you keep Dh100,000 on deposit in the bank, you are losing Dh3,000 in buying power,” explains Prince.

Although there has been a rise in the number of financial education initiatives recently, there is still a huge part of the population, including the millionaires, who share Selma’s attitudes toward money.

A survey conducted by French consulting firm Capgemini among more than 5,200 high-net-worth individuals in 23 countries showed that a huge portion of the assets owned by wealthy individuals are rotting and being eaten away by inflation.

The study found that 18.4 per cent of the wealth accumulated by millionaires are still sitting in retail bank accounts, while another 14.9 per cent exists in the form of physical cash – they are either hidden under the mattress, stashed away in a jar or other secret places outside the financial institutions.

Part of the problem is that a lot of people don’t feel confident about putting their money in financial instruments that offer returns or hiring a planner to manage their wealth. Keeping liquid assets within arm’s reach looks like the most secure option.

How to handle your money

Sharon Pereira works for a public relations agency in Dubai. Like Selma, the Indian expatriate keeps some cash in the bank, but only for emergency. The money represents about 5 to 10 per cent of all the dirhams she has saved in the nine years that she has been working in Dubai. The rest of her savings are  tucked away in mutual funds, real estate, gold and other investment vehicles.

“To be frank, it’s not a lot of money, but it gives me the necessary assurance that I have cash at my disposal if required,” she says. The interest on the bank account is just too small to notice, so she's not expecting much from it in terms of returns. "I would have earned more in cash back if I spent it on my credit card," she adds in jest.

Pereira has long realised that if she keeps all her eggs in one basket, the result of her years of hard work will simply be wiped away by inflation. “From a safety and security perspective, banks definitely rank high. However, returns are not as attractive as compared to other financial instruments and products,” says Pereira. “In general, certain investments yield better returns at low risk.”

Yaser AbuShaban, member of CFA Society Emirates, says that holding cash is an integral part of any asset allocation, to ensure that the saver is protected against periods of extreme market volatility. But holding cash must be done in a “measured way”.

If someone wants to have peace of mind knowing that there’s enough money to dip into in times of emergency, there are “better assets” worth looking into, such as gold and precious metals.

“While cash merely holds its value in periods of extreme volatility – unless these periods are also accompanied by high inflation – precious metals tend to rise in value during these periods, especially when inflation is high.” “Hence, as protection against extreme events, precious metals represent a much better investment than cash.”

Best strategy

But what’s the best strategy that can help expatriates maximise the returns on their hard-earned money? While there is no “magic solution or a one-size-fits-all answer” for everyone, AbuShaban says a good rule of thumb to keep in mind is that the younger the expatriate or individual starts investing, the greater the wealth.

“[And] the more tolerant that individual should be of risk taking. This translates into higher allocations to stocks and illiquid assets such as property for younger investors or those with higher levels of absolute wealth,” he advises.

But for UAE residents who are already into retirement and want to ensure that money will continue to flow in when they no longer work, a more “conservative” approach is in order. AbuShaban suggests looking at income-generating bonds and “defensive assets”, such as cash.

“For all investors, it is advisable to hold some portfolio insurance against extreme events and high market volatility in the form of precious metals, in the range of 2 to 5 per cent of the total portfolio value,” he adds.

Snehal Urankar, investment advisory analyst at Nexus Group, advises that investors should always keep in mind the single main principle for wealth management: diversification.

“I think a durable portfolio should have a variety of components, such as cash, bonds, insurance, real estate, other real assets, and also some alternative investments,” she says.

“Collectibles are also gaining popularity as a way of diversifying portfolios, as these have a low correlation to financial assets. How much a person should allocate to each asset class is entirely dependent on their risk profile and time horizon. There is no magic formula for this, it would vary on a case by case basis,” she says.

If you’re looking to build one million dirhams, for example, Hamzah Shalchi, regional manager of Guardian Wealth Management, has crunched the numbers.

He advises that a good strategy is to save Dh5,000 a month for seven years and wait for another 13 years, allowing it to accumulate interest and grow. The key is to put the saving in an instrument that gives away 5 per cent return. 

After a seven-year period, it is believed that the money in the pot would have grown, thanks to the power of compound interest, and if the saver waits for another 13 years, that pot could eventually grow to Dh1 million.

“The idea is to invest a decent amount of savings every month for seven years and then do not touch it for [another] 13 years so that it accumulates interest, which eventually grows the savings pot into Dh1 million,” Shalchi explains.

Since Selma is still in her early thirties, it may not be too late, after all, to start putting that Dh100,000 to work.