Save regularly to stay out of debt

Dubai: If your bank account is empty and you are neck-deep in debt in your 30s, you seriously need to sit down and review your financial health.

You may need to change your spending habits, modify your priorities, set some clear financial goals and possibly find ways to increase your earnings.

Most financial advisers will recommend that you start saving right away, settle high-interest loans first, insure both your debts and income and set aside an emergency fund.

"Sorting out your finances requires a full financial health check of all of your incomings and outgoings," says Paul Bromley, commercial director at Nexus Insurance Brokers.

"This will give you a good idea of what your money is being spent on. You will then be able to reallocate your money to pay the most important bills and loan payments, and to work out how much you can realistically send home to your family."

"Once these responsibilities are taken care of, you can calculate how much you have to invest in savings, a retirement plan and insurance.

"This does not have to be expensive and can be worked out with the help of an independent financial adviser to suit your needs. Making small regular payments is enough to start with if you are under 35, payments can always be increased as finances permit."

Steve Gregory of Holborn Assets recommends that young workers start a pension and build money in a shorter term savings plan.

But how much money do you need to set aside if you have no savings at all?

Compound interest

If you use the power of compound interest, Bromley says saving a small amount regularly can be beneficial for a 35-year-old in the long run.

"As a very rough guide, saving regularly a sum of, for example Dh500 per month, if saved at five per cent per annum compounded monthly for 25 years, can deliver a sum in excess of Dh290,000 for you," he says.

"A rule of thumb would be to divide your age by two and save that percentage of your salary. For example, a 40-year-old would need to save 20 per cent of his salary. If such saving levels are not possible, at least try saving something — even if it is just $100 each month," adds Darren Ashley of Candour Consultancy.

For those who may be able to save a little, Gregory cautions against putting their money in property, unless they intend to live in it now or in the future.

"Property is always seen as risk-free and a great way to invest. But it's only gearing that makes it work. Gearing is when you borrow money to invest. In the case of property, you borrow to buy the property. The risk is actually enormous. Say you pay a deposit of ten per cent and fees of five per cent and that is all the money you have in the world."

"You take ownership of the property and its value falls 20 per cent and you lose your job, so you sell it. Selling it does not repay the bank in full, so you have now lost every penny you invested in the property, and you owe the bank a further five per cent of the purchase price you originally paid.

"I agree that sometimes property markets go up, but I can promise you that the cost of borrowing money to buy a property, the agent cost and legal costs, and the upkeep of the property all combine to eat into any profit you might make on the value of it," Gregory explains. Instead, it would do you well to buy mutual funds which invest in all kinds of companies and markets.

"Values can go down as well as up from time to time. But you will never lose all you invested and still owe the bank money. These can be encashed at any time."