“Wealth is the ability to fully experience life.”
Henry David Thoreau
Wealth is a relative term, while it may have many shades of meaning, it largely refers to having more of something like; money, food, gold, property, cattle etc...
I would equate wealth as being Financially Independent and being able to leave a legacy for my family and the society.
The challenge however is using our finite resources and opportunities to create lasting wealth, while providing for today's needs and wants.
Here are the Six Pillars which can help us overcome this challenge;
Pillar 1: Managing Cash-flow efficiently
"Don't tell me where your priorities are. Show me where you spend your money, and I'll tell you what they are." - James W. Frick
If creating lasting wealth is your priority, then you must tell your money what to do and see that it does precisely the same.
Imagine an organization which does not keep its accounts nor has a balance sheet? How long do you think, such an organization will last?
Not for long, isn't it?
Similarly, If you want to achieve Financial Independence, then you must manage your cash flows efficiently.
The simple acts of maintaining a family budget and tracking expenses regularly can show you where exactly your hard-earned income is going.
A personal balance sheet is like a GPS, it will show how near or far you are from achieving your financial objectives.
Reviewing your budget every month, and your net worth every year, will help you measure your economic progress. They will also highlight inefficient expenses, debts and assets, helping you make necessary changes to your spending, saving and investing habits.
Click here to know more about creating and managing a budget and net-worth statement.
Pillar 2. Build a Financial Safety Net
One of the primary principles of sound financial planning is being ready for expected and unexpected financial events of our life. Goal-based planning helps you prepare for outlined events like retirement, children's education etc.
Having adequate emergency savings will help you manage unexpected events like a car break down, family emergency or even a job loss.
An emergency fund aims to meet two vital objectives:
- It keeps you from panicking by creating a financial safety net for unforeseen emergencies! helping you handle the situation much better
- It also helps you avoid the use of high-interest credit cards or loans in such circumstances.
I would recommend an emergency savings of at least three months of household income if you are single or a working couple. If you are a family with children, then I would recommend 4-6 months of household income.
All or most of your emergency savings must be accessible within 24 to 36 hours. People typically save in eSaver/Active Saver accounts, National Bonds or FCNR deposits for easy access of the money.
Pillar 3. Protect the greatest asset you possess
Your income earning ability is the greatest asset you will ever have; continuance of this asset largely depends on your health and longevity.
While you can strive to maintain good health, you still carry the risk of serious illness, injury or death, due to factors out of your control. Losing this precious asset can have a significant impact on your family's lifestyle and their future.
Having adequate life and critical illness insurance from a trustworthy international insurance provider can help you mitigate this risk.
Pillar 4. Pay Off Inefficient Debt
Inefficient debt in layperson terms is the debt which is incurred to buy retail stuff and typically carries a very high-interest rate. Credit cards and Personal loans are some of the best examples.
Credit cards in the UAE charge approximately 42% PA as interest. If you keep making minimum payments only on your card, you will pay more than your actual borrowing as interest in less than three years.
List all your debts and track the total interest you are paying on all inefficient debt separately on your budget to realize how much you are spending as interest every month and year.
The next and most important thing to do is stop further borrowing, condition yourself to spend cash for all your purchases, however big or small. Your rainy day fund is the go to place in an emergency and not your credit card.
You don’t want to dig a deeper hole while you’re trying to work your way out of debt! - Dave Ramsey
You can use one of the following strategies to eliminate debt quickly;
- Debt Snowball method
- Debt Avalanche method
Pillar 5. Invest at least 15% of your income for long term goals
A survey conducted by Compareit4me.com in 2016 revealed a shocking fact that almost 30% of residents do not save even a single dirham. I don't think the situation would be much different even now.
Our primary objective of living and working in the UAE as expats is perhaps to save and invest more than what is possible in our home countries. Not achieving this central objective defeats the whole purpose of being an expat.
What is investing?
Investing in simple terms is parting with your money and putting it at work so that it can grow over time. The longer you can put your money at work, the more it becomes.
It is not just about deciding where to put your money and at what rate it grows, it’s more about how you can use it to create lasting wealth.
Why must you invest?
"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Robert G. Allen
You should invest your savings, to beat inflation, grow wealth or to provide an income or do both in some cases. Inflation is a very potential financial risk, and prudent investment is the only known antidote to mitigate this risk.
You cannot reap if you don't sow and till. Investing can help you reach big financial goals, which otherwise may be very difficult or even impossible.
You should invest your savings in a well-diversified portfolio of different asset classes. A part of your investment should be in passive income-generating assets like Bonds, dividend-yielding stocks or Mutual funds, rent yielding property or annuities.
Pillar 6 - Plan and Create a Legacy
Legacy is what we leave behind to our heirs and loved ones. It includes money, assets, belongings, and more importantly, values and life lessons that can help our future generations survive and excel.
My childhood friend Suresh(name changed) was a fun-loving and carefree soul, and he always lived for today. Nothing wrong with that, but the trouble was that he only lived for today, totally ignoring his and his family's future.
He would always put off investing, stating that he is young and had lots of time to save and invest. Not that he did not care for his family, or he did not earn enough to save and invest; it was just plain procrastination. He always wanted to create a good future for his children, but could not get himself to act on his intention.
We all have a limited time on this planet, don't we? And still, many live their lives as if they will live forever. They keep putting things off, thinking that they will have enough time. I'm sure my friend Suresh was expecting to live a lot more than Thirty-Six years. The harsh reality is that no one knows how much time we have. If leaving a legacy is an important goal, then we must stop procrastination and start working for it immediately.
Don't forget the will
A Will is an important legal document in UAE. It stats how you want to distribute your wealth and who you want to assign guardianship of your minor children after your death.
What Happens If I Don't Have a Will?
If you die without a will(Intestate)—then your assets are distributed according to Sharia law of Inheritance. The guardianship and the custody of your children is also according to the Sharia Law.
We will discuss more about legacy planning in future articles.
Given the global economic uncertainty, family and social commitments; building wealth is undoubtedly a challenge but not impossible.
The following Six Principles will help you create lasting wealth with the desired ease;
- Managing Cash-flow efficiently
- Build a Financial Safety Net
- Protect the greatest asset you possess
- Pay Off Inefficient Debt
- Invest at least 10% of your income for long term goals
- Plan and Create a Legacy
As a qualified and independent financial advisor, I can help you achieve your goals faster with relatively less effort.
Arrange a free consultation to know how?