6 Financial Health Tips for Better UAE Living

The secret to building wealth and achieving financial independence is learning how to make money work for you. While human productive days are limited by sickness, tiredness, and even death, money can keep working every minute that the financial markets are open. But how can you make money work for you as a UAE resident? There are six things you can do right away to build a foundation for a prosperous future.

1. Create a budget

To make money work for you, you need to spend less than you earn. The first step to achieving that is creating a budget. A budget is the primary way to gain control over your finances. In a country where luxuries abound, and there is always a temptation to overspend, a budget helps you keep your finances in order.

If this is your first time budgeting, the 50/30/20 rule is a good place to start. It requires that you spend 50% of your income on needs (food, clothing, transport, shelter, etc) and 30% on wants (dining out, entertainment subscriptions, vacation, etc.) while saving/investing the remaining 20%. Since the end goal of budgeting is to spend less than you earn, this rule ensures that you are consistently putting away 20% of your income.

2. Stick to your budget

However, creating a budget is the easy part; sticking to it is where the battle lies. There will always be a temptation to go beyond your budget and overspend on some luxuries that appeal to you. This is where discipline and delayed gratification are important. You need to weigh the future financial prosperity and independence you want to build against current indulgences.

Another important tip is to save before you spend. By putting the 20% of your income away in some savings or investment account, you can make it easier to discipline yourself to spend within your means.

3. Build an emergency fund

Even though we recommend spending within your means, we recognise that some emergencies (medical conditions requiring out-of-pocket expenses, car repairs, travel) will arise that will require you to spend outside of your budget.

To avoid messing up your budget, you need to use the 20% of your income you are saving to create an emergency fund. This fund will be your go-to when emergencies arise.

Experts usually advise that such an emergency fund should hold up to six months’ worth of your living expenses (your needs plus wants). If your living expenses add up to AED 5,000 in a month, you will need an emergency fund of AED 30,000.

4. Pay off your debt and avoid new ones

It’s important to make a distinction between good and bad debt. The former is debt you incur to improve your earning power (student loans), purchase assets that appreciate (mortgage loans), or generate income (business loans).

On the other hand, bad debt is high-interest consumer debt like credit card debt, payday loans, and (personal) car loans.

Since these loans charge high interest (higher than even the returns on many investment assets), it’s better to pay them off even before investing in the financial markets.

If you have built your emergency fund halfway, you can focus on paying off any bad debt with the 20% of your income, before returning to completing it.

5. Create an investment plan

Once you have an emergency fund and you have paid off bad loans, it’s time to focus on investing in the financial markets.

Learning how to invest money in the UAE is key to building wealth. An investment plan will cover the amount you are investing, the regularity with which you are investing (usually monthly), the assets you are investing in, and the average return on investment you can expect on those assets.

Some of the best UAE investment opportunities include stocks, bonds, exchange-traded funds (ETFs), and real estate investment trusts (REITs), gold, and silver, among others.

You can choose a passive or active investment strategy With the former, a wealth advisor will create a personalised portfolio for you based on your risk tolerance, financial goals, and time horizon. Sarwa provides this option through its Sarwa Invest platform.

If you prefer the active investing route, you need to create a diversified portfolio that includes all these assets (and more) with an allocation formula you are comfortable with. Sarwa provides this option through its Sarwa Trade platform.

6. Invest consistently in the financial markets

Everyone can invest in the financial markets, but wealth building requires consistent investment.

Once you have designed your portfolio, you need the discipline to keep investing every month.

Over the years, you will benefit from the ‘magic’ of compound interest and see your small seeds grow into a massive tree that produces fruit, especially when you can no longer sow seeds.