How best to spend a bounty (if you have one)

Have some fun if you receive an unexpected windfall, is the surprising advice from financial experts. But if it's big enough, they have some more advice.

Gulf News created a few scenarios to which the advisers responded

1. A single man, in his mid-20s, earning about Dh8,000 and helping his parents with a monthly remittance. He has an old car bought on a loan. When it comes to hobbies of deep sea fishing and snorkelling, he can get a bit indulgent.

3.  A family of four (husband, wife, two middle school-going children) with an income of Dh15,000-20,000, has a mortgage on a house, some credit card dues and small but regular investments towards retirement and children's higher education. Also, has an emergency fund.

2.  A family of three (husband, wife, both in their late 40s with their only child in college), earning an income of Dh10,000 to Dh14,000. While they have paid off their mortgage, they must cope with high college costs of Dh5,000 every month and medical expenses due to wife's ill-health.

4. A blue collar worker in his early 30s, earning between Dh1,500 and Dh1,800. He sends Dh1,000 home to parents who do not work and has responsibility for a brother (graduated but unemployed), sister (to be married off), wife and a child. He deposits Dh100 every month in a savings account back home.

Steve Gregory, managing partner at Holborn Assets, suggests:

"Firstly, set aside 10 or 20 per cent to do something that you might never again have the opportunity to do. This might be a sky dive from an airplane, a driving course at a race track, dancing lessons for a year or in the case of our sun-loving snorkelling person, a holiday of a lifetime in Thailand or off the Barrier Reef in Australia. He can hire a Neptinic shark suit — metal mesh body safety suit — in case he meets a great white, and still have change.

"Next on his list of priorities will be to repay any debt that he may have, in particular credit card debt which is so expensive in the UAE for lower salary earners.

"Thirdly, he has the chance to upgrade his car if he wants to. Perhaps 20 per cent of his windfall may go in this direction, and while motor cars are never an investment, a newer model will be more frugal on fuel and require less for repairs for a few years than his present model.

"An upgrade in clothing is likely to be a useful investment also. Five per cent of his windfall spent on clothes and shoes will change his attitude to himself for a while. When you look successful you tend to act more successfully, and the changes could trigger a job change or a promotion in the near future. Confidence begins with knowing you look good.

"It's nice to share a surprise windfall, and he may wish to donate say 5 per cent of his windfall to people he loves and supports. This keeps him in the market for reciprocation in the event someone he shared with wins a million. Karma determines you sow what you reap, and if you are believer you probably believe that you should share what has been granted to you by the grace of God.

"By now, we are left with about half. For most people this is not sufficient to invest long term in riskier assets, and it's possible that government bonds or bank bonds in the UAE will grow the monies while allowing instant access and relative security. An emergency fund is something everyone needs, because good and ill fortune arrive when unexpected usually."

Sarah Lord, wealth planning director, Killik & Co. says:

"As it is a windfall and it is an unexpected lump sum which has been received, I would suggest that an element of the money could be used for ‘fun' or be spent on things that maybe the family would not necessarily usually do. My suggestion would be that up to 20 per cent of the windfall could be put towards a holiday and ‘family fun'.

"With the remaining 80 per cent, I would suggest the following:n "Repay credit card debt as they have notoriously high rates of interest. An effective use of the capital is to repay the credit card debt as this will effectively provide a greater return on the money than putting it in a savings account and earning interest.

"They should consider putting an element of the windfall towards their mortgage as with credit cards, the interest rate being charged is likely to be higher than interest that they would receive on deposits. However, before doing so it is important to check the small print of the mortgage to make sure that they can make over payments without being penalised or whether there are any restrictions on overpayments

"If they already have six months emergency fund, there is no real requirement for any of the capital to be put on deposit and therefore they should look to put the remainder of the windfall towards their medium to long term financial planning goals, such as towards children's education and their own retirement. They could top up the children's college fund with a single payment of say Dh5,000 each and invest this in line with their other savings for this goal. As it is a medium term goal I would suggest that they can be taking an element of risk with the investment and should look to have [some] equity exposure.

"With the remaining windfall they should also look to make a single payment into their retirement fund, they can take more risk with this investment than the college fund due to the longer term nature of this financial goal. I would suggest investing in a fund which provides international equity exposure and therefore over the longer term is likely to provide a return over and above inflation and certainly more than available from bank deposits."

John Bailey, financial planner, Acuma Wealth Management, has this advice for the family:

"The first piece of advice would be to clear any small outstanding debts. Credit cards, loans and similar agreements not only eat into your monthly income, but typically have high interest rates. If you are able to clear these then you will have more disposable income and will be able to make your money work harder for you.

"With any kind of pre-existing condition, it would be strongly advised that the family is covered as a minimum with a UAE health card (Dh300). In the longer term, a fully comprehensive plan would cover the cost of outpatient medications and give you peace of mind.

"A basic family policy can be obtained from Dh7,000 which would save on costly medications and outpatient treatment. In the long run [this will] save money, especially if there are more significant health problems [later]. As these plans are renewed annually, the money saved could be used to ensure there is money year on year.

"Planning for the unknown is important, particularly if you are reliant on one income and a two to three month contingency plan should cover such events as redundancy. Putting aside an amount, say Dh15,000 in a high interest, instant access savings account should ensure that there is money immediately if required, and should earn interest roughly in line with inflation [helping to protect] the value. It would also be advisable to look at holding this offshore to avoid [negative implications] on death.

"Retirement is approaching fast with little or no provision other than relying on support from their child. A financial planner can put a bespoke plan in place and show what returns are needed to reach a specific goal taking into account investment risk, financial ability and psychological capacity to withstand a loss. The most important thing is to do something now, let your investment grow and let the interest start compounding to work towards your goal.

"While [a windfall] would not solve all the financial issues of day to day life, if [used] correctly, it could enable you to have a better lifestyle, both now and in retirement."

Krishnan Ramachandran, chief executive officer, Barjeel Geojit Securities advises:

"Someone earning between Dh1,500 and Dh1,800 and with a host of family responsibilities and commitments, is in a most difficult situation. Unfortunately this is the case with almost each and every blue collar worker who comes to the UAE hoping that he will be the saviour and benefactor of his family.

"The first move should be to become debt free, that is repay their debt in full.

"The next option will be to invest the balance judiciously in bank deposits or in a good mutual fund schemes. Of course, one cannot curb the natural human instinct to celebrate the moment, but this should not exceed five to ten per cent of the windfall gain. 

"The first principle to adhere is to try and reduce the monthly family expenses. The killer in reality is family expenses and in almost all situations this will be substantially more than what they were spending before the [labourer] moved to the UAE.

"With the savings from this he has to begin to [get ready] for his retirement and education of his children. A monthly recurring deposit or a systematic investment plan (SIP) of Dh100 to Dh200 in safe mutual fund scheme should be compulsory. The magic of the power of compounding of this investment strategy will be clearly visible in the next 10-15 years.

"The next step it to cut his own expenses in the UAE and, if he is able to, save Dh50 to Dh100 to top up his existing savings.

"[These savings] may be reallocated [later] to gold, which may be required for his sisters' marriage, or for any other commitment. As and when his income levels go up he will have to suitably rebalance his savings.

"It will be better for his brother to find a job in his home country, rather than taking a loan to bring him to the UAE as many do."

"It is thus important for every blue collar worker to clearly convey to his family members that he has no magic wand to solve all their problems and that they too must understand and support him and his initiatives. Family members should also try and contribute to the kitty by taking of some part time or possible full time jobs."