When told that they can make millions of dirhams in one month for as little as one fils a day, a group of women expressed their disbelief.
"That doesn't make any sense," said one Arab woman.
Apparently, the impact of compound interest, which Albert Einstein once referred to as the most powerful force on earth, is something many people don't quite understand.
Anselm Mendes, head of marketing at Continental Group, a company of independent financial advisers in the UAE, admits there is indeed a lot to be done to improve the financial literacy level among consumers in the UAE.
He says it is due to lack of knowledge that people tend to neglect the important areas of finance, such as managing their debt and planning for their future.
"There are packets of people who are financially aware but, by and large, the awareness of some of the concepts is not that clear and understanding the practical implications of these concepts is something that is missing," says Mendes.
Mendes, along with other representatives of Continental Group, recently met with female consumers in Dubai to teach the basics of finance, from saving money, budgeting, asset allocation to getting out of debt. The activity is part of the Financial Education Roadshow launched recently by National Bonds.
Explaining the power of compounding at the seminar, Aadil Kadri, manager, advisory at Continental Group, said that if people start saving one fils and double it every day for the next 31 years, they could amass Dh21.4 million.
That is seven times more than what anyone can make if they were to simply save Dh100,000 a day for over the same period of time.
Mendes says the example cited is a powerful demonstration of how saving and investing money, and having the returns invested back again can yield exponential returns.
"But when we explained the concept at the seminar, you could see the incredulity among the audience.
"They almost could not believe it. They almost came to the point of saying that we're wrong. That was a real eye opener," Mendes says after the seminar.
The financial literacy campaign dubbed "Let's Save America" made its own calculations to show the power of compound interest.
It says that if the world's oldest person, Jeanne Calment who died at the age of 122 had set aside a dollar a day, invested $365 (Dh1,340) a year that compounded at a 9 per cent rate, she would have generated over $149 million over her lifetime. The total investment would have only been a little over $44,000.
Mendes says many people also lack the understanding of how asset allocation works and they often neglect the importance of saving up and planning for retirement. "For them, asset allocation is a phrase, they don't realise there are different types of assets and that there are different risks attached to those assets."
Considering their retirement age and average lifespan, people normally have about 30 to 35 working years, when they are able to support themselves, and another 20 to 25 years when they stay idle and don't have an active income.
"People know that retirement will eventually come, but they don't realise that they've got 30 years to work for and support themselves now but during these 30 years, they also need to provide for another 20 years when they don't actually work."
National Bonds has launched the financial literacy programme following the results of the 2011 UAE Savings Index which showed that the majority of residents (nine out of ten) are not confident of their current savings and nearly half of the population saved much less than they had planned to last year.
The roadshow's sessions, held in Dubai and Sharjah, have so far had a great turnout and positive feedback. Sayda Romana, an expatriate from Pakistan, says she has learned a lot from the seminar. As soon as she got home, Sayda and her daughter sat down and calculated the power of compounding.
"I didn't realise you can really make that much money for so little. I've come to a decision that from now on,
I will force myself to set aside a certain amount each month. Saving and financial planning are some of the things I have neglected in the past but I've just realised that if we don't plan well, we won't have any money to fall back on in the years to come," says Romana.
It could take years to pay off credit card debt
Borrowers risk spending nearly a decade paying back a small credit card debt, if they choose to settle their dues on instalments, a financial advisory firm warned consumers in the UAE.
Calculations made by Continental Group showed that it will take six years and a half to clear out a debt as small as Dh3,000 if a borrower chooses to pay only Dh100 each month and the interest is pegged at 2.99 per cent. Paying the same credit at Dh200 monthly will mean the borrower will have to wait 21 months to get rid of his debt.
"That is why whatever your balance is, you have to pay it in full each month. Keep in mind that credit card money is not your money. It's the future money that you don't have yet and you're already spending it," said Aadil Kadri, manager, advisory at Continental Group. Kadri was speaking at a financial literacy seminar hosted by National Bonds at the Dubai Ladies Club, as part of the first phase of the Financial Education Roadshow.
Participants at the seminar, mostly female bondholders and members of the club, acknowledge that dependence on credit cards, as well as emergency and "unplanned spending," have landed people in serious financial trouble.
Kadri said many consumers get into debt because they either live beyond their means or maintain a flashy lifestyle, and they easily succumb to the lure of personal loans and enticing credit card reward programmes that offer cash back.
If you have too much debt and no idea how to get out of it, here are some ways to consider:
- Accept that you have a problem.
- Loan from your fixed deposits to pay up your debt. This type of loan will likely give you a lower interest compared to your credit card, thus you're in a better position to reduce your borrowing faster.
- Increase your income. If you're financially dependent on your husband or wife, find ways to earn extra.
- Obtain a personal loan to knock off your credit card balances.
- Talk to the bank.
- Get professional help.