Get creative with the ways to spend and save on your income. It will help you later on. Image Credit: Shutterstock

As inflation rises, a global recession looms, and chatter of cryptocurrencies replacing fiat money persists, the importance of financial literacy has never been more evident. Some argue that personal finance not being taught in schools is a general failure of the education system to identify the most relevant skills students should possess.

Others claim it is a parent’s responsibility to ensure their children are financially literate. Irrespective of which of these sides is correct, the fact remains that as adults, we are all responsible for managing our finances - whether paying off mortgages or student debts, or building and diversifying our wealth portfolios to prepare for retirement.

In the UAE, this is an afterthought for close to half of the country’s population; 45 per cent of residents say they have not yet started saving for retirement, and 40 per cent will only start saving 10 years or less before they are set to retire. For comparison's sake, approximately 75 per cent of American adults have begun saving for their ‘golden years’.

If you are not a part of the 33 per cent of adults worldwide who have sufficient financial education, here are some things you can do to change that:

Use the 50/20/30 budgeting rule

Coined by US Senator Elizabeth Warren, the 50/20/30 rule is a budgeting tactic that entails splitting your after-tax income into three categories of spending:

  • 50 per cent on needs;
  • 30 per cent on wants; and
  • 20 per cent on savings..

If you are a resident of the UAE, you are in an advantageous situation to maximize on saving potential as you keep everything you earn. With that said, avoid the traps of overspending and ignoring delayed gratification. Instead, follow the 50/20/30 rule to create a reasonable budget, stick to it, and realize your financial goals.

Think of it like a burger

Allocate 50 per cent of your total earnings to cover necessities like paying down debts, buying groceries, maintaining your health, and so forth - these are the buns that hold your financial potential together. If half of your salary is not enough to cover these expenses, you can downsize by, for example, limiting your use of taxis and frequenting the metro or compromising on luxury elements of your life.

While it’s important to be responsible, so is enjoying your life. This will help you make the 50/20/30 rule a sustainable staple in your life. That’s where the 20 per cent - the lettuce, tomatoes, and other preferred condiments - fit in. You can use this percentage of your savings for ‘luxuries’ like Netflix subscriptions and Starbucks coffee orders, as well as more miscellaneous expenses like going out with friends or buying gifts for family members.

Finally, the meat. This is the best 30 per cent as it makes your burger complete. It is crucial, and the reason that you are considering following this blueprint in the first place. In the short-term, 30 per cent of your savings may not seem like much, but in the long run, it makes a huge difference.

Use this allocation to create an emergency fund - something you should aim to have at least three months of savings for - to invest in stocks, and of course, to prepare for retirement.

Harness technology and youth

Almost 50 per cent of the UAE is aged between 15-35 years and this reinforces the importance of millennials and Gen Z in propelling the country’s growth[1].

Younger generations are more in tune with digital platforms and advancements in technology, and there are a plethora of online resources that are widely available for them to learn and improve. The next step is applying what is learned, as theory is nothing without practice.

For instance, if you learn about commodity trading from YouTube channels, make sure you try your hand at actually doing it on a reputable platform. If you still don’t feel comfortable, at least you are now better educated on the subject and you can reach out to a wealth management platform to help you build your wealth while having a better understanding of what’s going on every step of the way.

Plant your seeds now

According to a 2019 financial literacy survey, 43 per cent of UAE respondents between 16-24 felt unready to manage their own money, and 53 per cent said schools didn’t prepare them enough to manage their finances. The country has since taken steps to improve this, by rolling out initiatives like Ghaya in November 2020, to support UAE Nationals and their subsequent contributions to economic growth.

However, nearly 90 per cent of the UAE’s population is made up of expatriates and proactive action is still needed to enhance the region’s current financial literacy rate of 30.7 per cent. This will help the UAE catch the likes of Denmark, Norway, Sweden, Canada, the United Kingdom, Germany, Australia, and Finland, all of which boast financial literacy rates ranging between 63-71 per cent.

As the Chinese proverb goes: ‘The best time to plant a tree was 20 years ago. The second best time is today…’