One of the best ways to make your money work hard is to start saving early. A study by the Organisation for Economic Cooperation and Development in 2013 found people in the US saved just 4.5 per cent of their income compared to 8 per cent in Europe and 11 per cent in Australia. The UAE is not much better. A survey late last year for National Bonds Corporation found that 77 per cent of savers in the UAE did not think the cash they set aside would be enough, while a study this year by HSBC found that saving for retirement was not a main priority for 87 per cent of people.
“By starting early rather than delaying your savings for a few more years, you can considerably reduce the amount you need to save every month to reach your retirement goal. The longer you leave it the more you will have to save, the older you get. Time really is your most precious commodity,” says Jessica Cook, private client adviser with AES International, a global wealth management firm. Ideally, you should have two saving funds — one for emergencies, which experts say should be equivalent to around three months’ salary and can be accessed immediately, plus a second larger pot for your retirement.
Why set aside cash?
However, you could theoretically set up a savings pot for any upcoming expense like a wedding, holiday or even Eid, says Preeti H. Bhambri, Managing Director and Founder of comparison website Moneycamel.com. “By using your savings to pay for important events of your life you can avoid taking loans,” she adds.
But why should we bother saving when credit is so easily available? There are many reasons, as it turns out, from short-term emergencies to long-term goals and retirement. “If we have savings behind us we are, of course, more likely to be able to have the ability to choose what school we send our children to, which holiday we go on, the car we buy, where we live, and so on,” says Paul Karwat, a wealth manager with Professional Investment Consultants Middle East. “Saving provides choice and opportunity for you and your loved ones.”
But there are plenty of less positive reasons to put money aside. “One of the areas people forget when they are out here is that there is no pension or any social benefits,” says Ambareen Musa, Founder and CEO of financial comparison website Souqalmal.com. “There is nothing for you out there in case something goes wrong. Things go wrong all the time.”
And as she points out, the consequences of something going wrong in the UAE are higher than in other countries. Not only is there no social security system to pay out benefits to people in hard times, if you lose your job you also lose your residency visa and have 30 days to leave. “And if you don’t have an emergency [fund], your rent is still due, your bills are still due, your school fees are still due,” she says. “And if you have zero cash, how do you even pay for your ticket out? If you have a family you have to pay for everyone’s ticket.”
And once you are back in your home country, how do you survive while you look for another job? If you don’t have savings you will have no option but to get into debt to cover your living expenses, credit-card repayments and rent or mortgage. Yet losing your job is just one of a range of possible nightmare scenarios. You may also get sick and need to stay in hospital. “If your insurance doesn’t cover it all, like most insurances don’t, there is no public health care so you are going to have to pay up,” adds Musa.
And then there is retirement to consider. Few companies have any sort of scheme in place for their employees. And because we are all living longer, you will have to find even more money than you would have had to if you were retiring 50 years ago. “Most individuals will need a minimum of roughly 70 per cent of their pre-retirement income in order to maintain their current standard of living during their years of retirement,” says Cook.
Do the maths
Now you know why you need to save, the next question is how much you actually need to put aside each month. The amount will of course depend on how much you earn, but most experts say it should be somewhere between 10 per cent and 30 per cent of your monthly salary. “A good rule of thumb is to try and save at least
10 to 20 per cent of your income,” says Cook. “But you must budget for this. Don’t just do it because you have money left over at the end of each month. Consider it a monthly outgoing as standard.”
But then when you consider that none of us pay any tax here, some experts say we should actually be saving a bit more than that. Karwat suggests it should be at least a quarter of our income, if not more. “You are probably saving about this in tax that you would have to pay out if you lived elsewhere, so it could be argued that most people here should be saving more than a quarter,” he adds.
Bhambri says the figure should be up to 30 per cent. That may seem like a lot, but there are actually many people living in the UAE who save a higher portion of their salaries. “We can draw inspiration from some of the lowest paid people in UAE such as taxi drivers, labourers and domestic helpers who end up saving more than 50 per cent of their salary,” she says.
Edward Mainwaring-Burton, Senior Financial Planner at deVere Acuma, suggests that you look at how much you have left over after all of your regular expenses. That figure will be your monthly surplus. “Invest half of your surplus in your future and keep half in the bank for emergencies. If you find that there is no surplus then draw up a budget plan,” explains Mainwaring-Burton.
