Simple steps to kick off a new financial outlook

Want a new financial outlook? Then spend less, pay off your debts, build an emergency fund and start investing. It's that simple.

I want to get my finances in order. This means paying off my credit card debts and saving and investing more efficiently. At 30, I spend too heavily, save too little and invest nothing. What's the best strategy to kick-start my new financial outlook? BW, Dubai

Expert: Steve Cronin, founder of Wise (wiseuae.com), a non-profit organisation to help expats invest their own wealth

If you have a regular income, then this challenge is entirely mental: to increase saving and spending discipline, resist temptation, learn a bit about personal finance and avoid investing in bear traps. Here’s how to go about it:

• Mental attitude

Aim to think positively (fin-ancial freedom) rather than negatively (this will be tough on my social life), focusing on the future benefits. They will come sooner than you think if you get your credit card debt paid off. Enlist support and accountability from others. Practise saying no to expensive events, clothes etc. Accept that some people will not appreciate your new outlook. Make lifestyle changes gradual and sustainable – there is no need to be a hermit.

• Spending

You have to fix your spending patterns and pay off your credit card debt before thinking about saving and investing. Force yourself to go through your recent credit card statements and understand what categories you are spending on the most. Tackle the big items first – do you really need that health club membership? Check for things that add up over the month, like dinners and shopping. If spending is a bit out of control, set yourself a monthly budget for social events, clothes, food etc. Immediately write down everything you spend over Dh200 – it might make you think twice. There are also some great mobile apps for tracking budgets.

• Credit card management

Credit card debt has a very high interest rate, which can make it balloon fast if not paid off. Dh1,000 on a card charging 3 per cent a month becomes Dh1,426 after a year, with interest on interest. If you have multiple cards, always pay off the card with the highest interest rate first. If you can’t pay off the complete debt within three months or so, consider asking your bank to convert the debt to a loan, which will have a much lower interest rate. A consolidation loan can cover the debt from multiple cards. For your new monthly card spending, make sure you pay it off fully before the due date to avoid late fees and expanding debt. Set aside 10 to 20 per cent of your salary as soon as it comes in, using it to pay off your card debt or loan.

• Cash buffer

Once you have paid off your debt, you can focus on saving. As a general rule, pay off any debt with annual interest above 5 per cent before saving, as it’s not guaranteed your investments will make more than this every year. Place 10 to 20 per cent of your salary in a separate savings account (with as high a rate as possible). Create a cash buffer of at least three months, factoring in all your expenses, including rent.

• Investments

Once you have saved around US$5,000 to $10,000 on top of your cash buffer, open an investment account with an offshore broker like TDDI (Luxembourg), Interactive Brokers (US), Saxo Bank (Dubai) or SwissQuote (Dubai). Invest monthly or quarterly in passive index tracker ETFs and try to look at your account as little as possible – at most once per quarter. A good mix for an average 30-year-old would be 80 per cent international stocks (eg HSBC HMWO or Vanguard VWRD) and 20 per cent bonds (eg iShares SDIG or IGLO). Finally, don’t invest in a long-term savings plan or life insurance policy with a savings component. The high hidden fees will slow your savings growth and you won’t be able to take the money out if you need it.

Next question:

How is commission paid to financial advisers on a long-term savings plan. Can you break it down for me? I have a 25-year plan and want to understand exactly how an adviser is paid and how that money is clawed back from the policy? SU, Dubai

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