002 - Savings and Investments Avenues in the UAE

I made this episode in 2022, had been sitting on it for about a year, until I finally had the courage to publish this for you. Whether you're in your car, on a walk, at the gym, or doing your chores, I have one promise to be genuine and help you with your finances. Enjoy listening to the episode of the Dubai Finance Podcast.

Financial peace isn't the acquisition of stuff. It's learning to live on less than you make, so you can give money back and have money to invest. You can't win until you do this. This is a quote by Dave Ramsey the acclaimed personal finance guru. I couldn’t agree more with the same.

Today’s episode is dedicated to Personal Finance, our focus is to understand the different Savings and Investment Avenues in the UAE.

Ladies and gentlemen, my fellow listeners, it’s my privilege to be your host from Dubai. My name is Divesh, and I welcome you to episode 2 of the Dubai Finance Podcast.

Savings

In the last episode, we touched upon the importance of tracking expenses, making a budget and allocating savings first towards a contingency fund and later towards investments. Today we dive a little deeper.

In personal finance, there’s a rule called the 50/30/20 rule. You shouldn’t have to be spending more than 50% of your income towards Essentials like, Food, Clothing, Housing, Education for kids, if you do, you’re actually living beyond your means. Next, Wants include lifestyle choice related spends like Streaming Services, Dining out, Gaming expenses. These should not exceed 30%. Finally, the remaining 20% of income should cover your Debt repayments and Savings. You must try to save at least 10% of your monthly income and keep debt repayments preferably lower than 10%.

To help you along in your journey, I have a Free Personal Finance and IPO Cheat sheet that I like to use and highly recommend on my website, that’s free for you to use as a signup bonus. Check it out at dubaifinancepodcast.com.

Now, contingency funds are used at the time of emergencies, that’s why they’re also called emergency funds interchangeably. The key requirement is, ease of access to withdraw funds with little to no volatility of the amount that is saved. Savings Banks on average offer between the range of 0.1% to 2% at present. The higher rates provided by Banks in most cases have higher minimum balance requirements. Alright, Savings Accounts are a good way to keep your contingency funds stashed at arm’s length, and without lying idle. When it comes to deciding which bank, you need to consider to open a Savings Account, I would say there are three key requirements, firstly the Bank should be stable and a financially sound institution. You don’t want to have to sweat over whether a Bank will go Bankrupt and money will be locked in. It’s happened before during the 2008 recession, there were 25 banks that failed in the US as per a Fed report. In the UAE, we have Banks like CitiBank, or HSBC or Standard Chartered to name a few of the largest International Banks with strong financials, being publicly traded, you can download and review their financials to see how they stack up and then there are Local Banks, like ADCB and Emirates NBD. Depending on your preference, you could go either international or local. In my experience, local banks are good in terms of Customer service towards Retail customers like you and me, while International Banks are more focussed on Large Businesses and HNIs, hence their customer service may not be the greatest for individuals.

Among local banks, look for those that have a majority holding by either the Government directly or by an Investment Company led by a government such as Dubai or Abu Dhabi. As an example, I can tell you Emirates NBD has 55.76% holding by the Investment Corporation of Dubai, which is the Sovereign Wealth fund of the Govt. of Dubai. This information is publicly available on DFM’s site, you can access the Show Notes for the links and references (DFM, n.d.). (Investment Corporation of Dubai Wikipedia, n.d.).

Secondly, figure out the Interest Rates offered and the Minimum Balance or Salary transfer requirements to find out which Bank is preferable. You can do this analysis by viewing a comparison site like PolicyBazaar.com and perform a search. Lastly, find out the quality of Customer Service, go over Google Reviews, App Reviews and Word of Mouth experiences of friends and family.

Alright, ever had that feeling that your money in the bank doesn’t stack up with your expenses? Or you expected to have saved a bit more? You’re not alone, we’ve all been there, multiple times, a big culprit here is Inflation. Inflation acts as a silent intruder in our lives, steadily raising our cost of living, and shrinking our Savings.

If we look at the data on Inflation in the UAE in the second quarter of 2022 on Trading Economics  (Economics, 2022), it stands at 6.77%, up from 3.43% in Q1. While this may sound high, it is lower than the Global Average of 8.8% in 2022 as posted by the International Monetary Fund or IMF.

In this way, it’s possible to actually lose money, if most of your savings are stashed away in a Savings account, worse still in a Current account. Once contingency funds are covered, the next step should be towards building a pool of investments in different asset classes. It’s okay to start small, but it pays to be systematic and regular.

I’ve learnt the hard way, having squandered money buying useless things out of a whim, and hoarding it only to question myself later, what was the point of it all? We’re all human, and it’s easy to fall prey to FOMO and excessive consumerism. It’s best done in moderation, while trying to find ways to add to your income through wise investments. Albert Einstein once said Compound Interest is the eighth wonder of the world, the one who understands it, earns it, he who doesn’t pays it. Apart from building a contingency fund for 6 months in a Savings Account, I would save another 6 months’ worth of expenses in a secondary asset class like Savings Bonds, for three reasons, one is for diversification benefit, second is possibility of better return overall, and the third reason is, 1 year worth of savings is better than 6 months to cover life’s emergencies.

In any case, it pays to have financial prudence, and discipline, to achieve this, one excellent tool I’ve used over the years is recurring deposits. This puts the process of allocating money on autopilot towards building a contingency fund. You set the terms, the amount, the term, the frequency, and voila, you are building a contingency fund, just like paying EMIs or instalments for things you bought in the past, you instead are literally paying yourself forward, while earning interest rather than paying it. Once the deposit matures, you transfer the amount saved to your savings account and only revisit contingency funds at the end of each year. Even though we haven’t covered opening recurring deposit, I would recommend opening such a deposit in the same Bank where you intend to have your Savings Account. Although nearly all Banks should provide this facility, it’s best to check with them before you open an account just to be sure.

National Bonds – Savings

We’re nearly there in terms of contingency funds. There’s just one more item I’d like to talk about, and that’s National Bonds. They are a government owned Entity that issue savings solutions, the most common being Savings Bonds. This is a Sharia compliant product, as mentioned on their FAQs page, and it has a floating rate of return paid as Profit. Last year, Savings Bonds provided 1.5% return, which is comparable to a Premium Savings Account from leading Banks. The minimum amount of investment is quite low though, this is at AED 100, which gets you 10 Certificates worth 10 Dirhams each. A word of caution, Profit earning is unlike a regular savings account, investors are incentivized to hold bonds for longer periods to avail higher rates of Profit. From what I understand, if Bonds are redeemed during a calendar year after being held over 360 days, you get 100% of Profit accrued, between 180-360 days, it comes down to 80%, for 90-180 its 60%, 0-90 it’s 40%. Overall, this is a worthy alternative to Premium Savings Accounts, with similar return or higher, and with a much lower requirement for minimum amount invested. There’s one more thing, once you own Savings Bonds, you participate in a Rewards Program. This gives you the chance to win luxury cars and cash prizes yearly. Now, I am not usually in favour of raffle draws, but when this is at zero additional cost, there’s no risk involved, so it can’t hurt.

UAE Stock Market – Overview and how to setup a Brokerage Account

The UAE has a growing Capital market and has three Stock Exchanges currently operating within the country. These are Abu Securities Exchange or ADX, Dubai Financial Market – DFM and NASDAQ Dubai. Many prominent companies, covering a wide range of industries, such as Banks, Utilities, Real Estate are listed on ADX and DFM. Today I’d like to cover DFM for you. Let’s take a look at the market performance of its main index DFMGI. Since January 2012 to January 2022, the index has gone from a value of 2,492 to 3,329. That’s an increase of 33.6% over 10 years, including the pandemic hit years, and despite other global recession pressures, like the Ukraine conflict, otherwise performance would have been better, no question. Anyway, this increase, amounts to an annualized growth rate or CAGR of about 2.9%. To put things into perspective, let’s look at a scenario of an investor managing her savings of monthly AED 1,000. If she had kept this in a Current account, over 10 years, the amount today would come to AED 120k, that’s easy, 1000 Dirhams over 12 months over 10 years. Assuming she s