Moving away from your home country to set up a new life in the UAE is a daunting prospect for many new expats. But failing to take advantage of the tax-free income while resident here is a mistake many make.
To make matters worse, as our Money section highlights this week, many then take on unnecessary debt they cannot afford to repay. The result: rather than saving, they end up using their income to keep liabilities at bay.
The National now wants to help UAE residents develop a healthier relationship with their financial affairs.
To manage your money effectively during your time in the UAE, you should follow a nine-step plan, so says Sarah Lord, the managing director of Killik Chartered Financial Planners, a London-based company with an international branch in Dubai International Financial Centre.
Ms Lord, who lived in the UAE for four years before relocating back to the UK, has written a new guide – Financial fitness for expats: New wealth planning guide to help get in shape.
__________
Financial fitness
■ Read part two of the financial fitness plan for UAE expats
■ Read part three of the financial fitness plan for UAE expats
__________
In the first of a three-part series on financial health, we share the first three steps of Ms Lord’s plan, which aims to help expats living in the UAE manage their hard-earned dirhams more effectively:
1. Work out your net worth
All fitness regimes start with an assessment of your current health. The starting point for any form of financial planning is also knowing what you are worth now. You just need a realistic estimate of the current value of your major assets.
This list may include a property, a car, investments, bank accounts, a pension plan (if you and/or your employer have started one), jewellery, art and any business ventures you have a stake in. Don’t forget about “hidden” assets, such as cash sitting in a mortgage offset account.
Next work out what you owe to other people.
Start with any mortgage debt you have and then add in any personal loans and credit card balances. Again, try not to miss out “hidden debts” that are easily forgotten such as store card debts, outstanding student loans and hire purchase arrangements on cars and/or furniture.
The final step is to calculate your net work; simply – deduct your liabilities from your assets. The result is, with luck, a positive number that represents your current net worth. This will form the bedrock for your future financial planning and is a number that you should monitor at regular intervals from now on.
2. Start budgeting
Budgeting is a bit boring but the benefits are enormous. It can reveal:
• Where your money goes
• Whether you earn more than you spend
• How much more you could be saving
To create a budget, start by listing your income first (your salary from an employer, any rent you receive from renting out a property or room, and any investment income) followed by your outgoings (for example your rent or mortgage, travel expenses and day to day living costs).
If the gap between your income and expenditure is negative, you are spending more than you earn. Boosting your income may be tricky until you get your next promotion, so it’s often easier to cut back on expenditure.
If your budget throws up a surplus, don’t get complacent - you should still boost the amount you are saving.
This is where you need to assess your “need to haves” versus your “nice to haves”.
There are certain things that we need to spend money on - food, utilities and travel to work. Then there are the things that we choose to spend money on - holidays, clothes, club memberships, meals out (the nice-to-haves). Ask yourself:
• Do you really use that expensive TV sports subscription?
• Could you use discount vouchers to save money on meals out?
• Are you using your club memberships often enough to justify the fee?
• Do you book holidays ahead to secure the best deals?
Next, your “need-to-haves”:
• When did you last remortgage/talk to your landlord to get a better deal?
• Have you checked if your car/home contents insurance is still competitive?
3. Create an emergency fund
As we hit our 30s and 40s and take on more responsibility we need to be ready for losing a job, illness and disasters such as a car accident or a flooded home.
An easy way to ensure that you are not caught out financially is to set up an emergency fund that will tide you over while you get through the hard times. An amount equivalent to either three months of your gross salary or six months of your net is a good starting point.
An emergency fund needs to be easy to access so the most obvious place to keep it is in cash via a decent bank account. This won’t earn much of a return but will mean that the money is on tap should you need it. You should also consider that you may have financial liabilities in a currency that is not the same as the one that you are paid in.
Remember that however you choose to store your emergency fund, it is for emergencies only. Do not be tempted to dip into this money to cover your day-to-day expenses or fund a major purchase on the basis that you will “top it back up again later”. You don’t want to be forced into an expensive borrowing arrangement if disaster suddenly strikes.
Also, make sure to cover the worst-case scenario - your own death. Once you are established at work and earning a good income, give some thought to how you can protect it. If you are married and/or have other financial dependants such as children, it is vital to make sure you have adequate life assurance in place. This is designed to pay out a sum of money to your dependants on your death. It is important to review the cover you have in place on a regular basis to ensure that it is sufficient but also that your premium remains competitive.
• In part two, Sarah Lord reveals how to clear expensive debt, setting your lifetime goals and designing your investment strategy.
pf@thenational.ae
Follow us on Twitter @TheNationalPF
