Financial fitness plan

Over the next few months I plan to cover a number of aspects of financial planning, to hopefully build what might be a useful financial fitness plan. Very similar to when you visit the gym and start a physical fitness plan, you will not see results immediately, but over the course of weeks and months, by sticking to your goals and plan the benefits will start to show and build as time progresses. And your financial health is very similar – a lot of people become disillusioned when they do not see immediate results, or suffer a setback, but the key is to stick with the plan and carry on building for the future.

In my last column, I spoke about life insurance and the reasons why you should consider protecting yourself should anything happen to you. This month I will cover debt, some of the key things to be aware of and the best way to manage debt.

Unless you are very fortunate, most people will use debt during their lives, and debt itself is not a bad thing, as long as it is used and managed correctly. It can easily get out of hand if it is not carefully monitored. For large purchases such as property debt is often used, and referred to as mortgage. The interest rate is generally relatively low for this form of borrowing, as the term is generally long and the debt is secured by an asset. So the lender is confident that it would make money over the long term and has control over the property if you should stop paying back the debt.

The property market in the UAE has seen a recovery over the past year or so, encouraging more people to consider buying property. The Central Bank has been looking at ways to try and control the market. One way that they are considering is to cap the borrowing limits available to purchasers, to force them to put down a reasonable deposit, which should hopefully reduce the amount ‘flippers’ in the market and make the market more stable.

Unsecured debt

Where many people can quickly get themselves in difficulty is with unsecured debt, such as credit cards and personal loans. These forms of debt have a higher interest rate applied to debt because the lender has nothing to hold as collateral, and the loan is often over a shorter period of time. Using a credit card as an example, you can spend each month, and pay a portion off, but the interest will be charged on the whole amount, and interest rates of credit cards can be up to 40 per cent per annum, but is likely to be shown as 2 per cent per month, so you may not realise the true cost of the borrowing, and then over time the debt builds up to a point that it is difficult to repay.

Looking at a couple of terms that you often see quoted after interest rate numbers, the first is the flat interest rate – this is an interest rate calculated on the basis of the stated initial principal amount of the loan irrespective of the term of the loan. While the Annual Percentage Rate or APR is the annual rate that is charged for borrowing, and expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction. The APR is generally a higher number and is a much more accurate measure of the cost of any loan.

This is a brief summary of the debt situation, and next month I plan to look at wills and other protection solutions.

The writer is regional director at Acuma-Independent Financial Advice. Opinions expressed here are his own and do not reflect that of Gulf News.