As expatriates in a foreign country, we have all been in this situation before: learning how to deal and budget in a currency that’s different from our home country. The UAE’s low-tax environment and quality lifestyle continue to attract expatriates from all over the world to live the good life. Although most adults have a functional understanding of how to manage finances, it gets difficult when you earn in a currency different from your home country where you may have current commitments and future retirement plans.
How to adapt to a new currency?
In this story, we focus on how expatriates, both old and new, can manage their finances with a new currency and adapt to the cost of living in the UAE.
Personal finance analysts point out that one of the biggest advantages of living in the UAE is the currency’s fixed peg to the US dollar. This effectively allows you to convert costs into the world’s leading currency. Therefore, it is easier for new expats to manage their budgets in the UAE compared to moving to a city that has fluctuating currency levels.
Budgeting is the first step
“The first thing about budgeting is to understand your fixed capital cost [mortgages in your home country, life policies, etc.] plus your fixed operational costs [rent, school fees, etc., in the UAE]. One must plan their variable spending after meeting the fixed obligations and after keeping 5 to 10 per cent of their income in savings/investments for the future,” Anita Yadav, Partner, Aspire Capital, told Gulf News.
It is essential for expats to make a list of all the major expenses they are likely to face in the UAE such as rent, travel, food, education, mobile, utilities and entertainment. They could then compare it with what they would spend on each in their home country to set some anchors. This will help understand the approximate cost of living in the UAE.
When you arrive in to the UAE, it would be prudent to start a spreadsheet and enter all your fixed costs into it, so you get an idea of your expenses and disposable income
“When you arrive in to the UAE, it would be prudent to start a spreadsheet and enter all your fixed costs into it, so you get an idea of your expenses and disposable income. Once you know what this is, it will allow you to get an understanding of what you can afford to spend and save,” said Adrian Luscombe-Whyte, Senior Associate at Holborn Assets, a UAE-based financial services company.
Keep some buffer money aside
An unfamiliar currency removes all the mental anchors you associate with the price of everyday items, such as a restaurant meal or a bottle of milk. Depending on how much you earn and the exchange rate, everything could either seem really expensive or really cheap. Therefore, it is always advisable to have a buffer and save some cash on top of your monthly expenses so you don’t get a nasty surprise.
Rajeesh Ali, an Indian expat who moved to Dubai 10 months ago, recalled the initial challenges he faced when transacting in a new currency.
Don’t convert prices into home currency
“Everything you used to deal in 1000s and 10,000s in India seemed to be cheaper because of the UAE dirham’s currency valuation. Initially, you have to do the math before you spend. You convert the value in dirham to your home currency and compare the amount of money you spend. Eventually, I got over this tendency and started assessing my expenses in dirhams. Funnily, today I sometimes calculate in dirhams instead of rupees when I am on holiday in India,” he told Gulf News.
Prepare for upfront costs
According to Steve Cronin, founder of DeadSimpleSaving.com, which helps expats take control of their finances: “You should always try to have 3 to 6 months’ expenses saved up as a cash buffer in case you lose your job. Moving to a new country incurs a lot of costs upfront, especially if you have to pay rent and deposits. You may not get access to a bank account immediately either.”
Understand the exchange rate
For an expatriate to truly understand the value of a new currency, they need to know what the exchange rate is with a currency they are familiar with.
The exchange rate between the currency of the home country and that of their employment country can vary on a month-to-month basis, in fact it is more dynamic, daily or in some situations by the minute, for example the Lebanese pound in recent months, due to differing economic performance, interest rate changes, political changes, etc., in the two countries.
Although foreign exchange rate movement is complex for the average expat to understand, find an exchange rate that you can calculate in your head easily to make sense of the currency.
A link back to a familiar currency will restore those mental anchors and show you whether your purchase is going to be reasonable
“If you are familiar with dollars, euros, pounds or rupees, you are bound to find one that is easier than others. This link back to a familiar currency will restore those mental anchors and show you whether your purchase is going to be reasonable. Do these mental calculations before you stand in front of the ATM at the airport. We have all stood there in a new country, wondering if we are going to take out $10 or $1,000 by mistake,” explained Cronin.
Yadav recommended that an expat must keep aside a buffer of 10 to 20 per cent of their total expenses for currency fluctuations, particularly if majority of their expenses are in a currency different from their income currency. Meanwhile, Luscombe-Whyte advised expats to be cautious at the outset until they get a good grip on costs and purchasing power.
Of total expenses must be set aside as a buffer for currency fluctuations
Factor in currency depreciation
Subodh P., a long-term Indian expatriate in Dubai, told Gulf News that the biggest concern in parking savings in INR (Indian rupee) is how the value of the currency has consistently depreciated over time. “The INR was equivalent to USD in 1947, whereas 1 USD can buy almost 76 INR today. The value of INR has been depreciating approximately 5 per cent per annum over the last 10 years. This depreciation of money combined with severe inflation [official rate of 4 per cent per annum] does not portray sending money to India and parking funds in banks as a sensible thing to do,” he shared.
The INR was equivalent to USD in 1947, whereas 1 USD can buy almost 76 INR today
Instead, Subodh suggested that expats may consider US dollar investments such as an offshore term deposit account or an equity-related investment as a sensible approach. “Given the opportunity the Indian equity markets and other high growth Asian markets currently give, one could venture into such lucrative investments through an offshore USD-denominated fund. This will allow people to tap the high-growth equity markets and keep their money in USD,” he added.
Find investment advisors if needed
The analysts Gulf News spoke to recommended that expatriates engage with investment advisors or financial brokers who provide guidance on the expected direction of exchange rates on a regular basis.
Gulf News also caught up with Ananda Shakespeare, a seasoned British expatriate in Dubai, to understand how she manages her finances. “I find it easy to budget in dirhams as I’ve been in Dubai for 15 years now. When I am paid, I pay my bills and then I spend and save what’s left. I have savings in the UAE and in the UK in pound sterling. When transferring, it’s better to use an agent or exchange house and save money instead of using a bank and paying high rates in currency conversions,” she said.
Saving with a new currency
While earning in a new currency and being tax-free, it is common for expats to get carried away and not save enough for the future. Saving is not as much about currency as about prudent budgeting and controlled spending. Expats should avoid going on a spending spree and remember to stick to a budget.
“Whichever country you are in, track your income minus your expenses, which is your monthly savings rate. Living in the UAE is an amazing opportunity to save money, so budget to have a certain amount saved at the end of the month and make sure that happens. Then try to increase it each month and invest the money sensibly. Beware of advisors who offer savings plans or other complex products that you may not have come across in your home country,” warned Cronin.
Currency fluctuations impact heavily
Expats must also factor currency fluctuations into their savings plan. Apart from the US Dollar, the AED (dirham) will also fluctuate against an expat’s home or base currency. For instance, countries such as India and Pakistan tend to have current and fiscal account deficits, which tend to put pressure on their currencies, thereby causing continued depreciation. Therefore, analysts recommend expats to keep their saving and investment in UAE dirham as the exchange rate becomes more favourable with time.
I always advise my clients to look at the currency movement within the last 5 to 10 years to get a low and a high point
“I always advise my clients to look at the currency movement within the last 5 to 10 years to get a low and a high point. There is no exact science to this but you should be able to find an average and I would advise using this as a starting point to plan,” advised Luscombe-Whyte.
A word of caution about remittances
While remitting money to their home country, expats must also be careful to check the margin charged by currency exchange houses.
“Smaller exchange houses can sometimes charge between 5 to 10 per cent of the total amount - either building it in the offered exchange rate or charged separately as exchange fee,” Yadav informed.