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One of the reasons many people decide to live and work in the UAE is the zero per cent income tax. If that’s your case, the incentive might be an excellent opportunity for you to save more money. After all, you don’t have to pay out a large chunk of your salary each month in income tax.

Being able to save more money is great, because you want to ensure that money is there when you need it, not just for now but later in life. Whether it is for a comfortable retirement, your children’s education or a large asset purchase, you want to have money available.

Although this may be true, using a local or international bank to build up cash deposits won’t help your savings. The reason for this is simple. There is often zero or very little growth to this cash resulting in erosion due to real-time inflation. At the end of the day, your money is losing purchasing power while sitting in a bank savings account. Another key point to consider is the nature of a savings account. The money is always readily available to you. So you might end up using this cash to buy that extra pair of shoes, a night out or any other unnecessary purchase.

There’s a Better Way to Save

An anonymous source once said, “If you never save money or invest, you will always be poor, no matter how much you earn.” That’s a fact! We all know that if you always spend everything you earn you will never have money.

As mentioned before, saving money is great. You should keep it up but in a more structured way. A way that gives you the medium to long-term growth opportunity while maintaining an element of access in times of difficulty.

Did you know that if you save your money rather than investing it, you will probably have to put away a lot more for a lot longer to achieve the same result?

Let’s take a look at the case study of ‘John Saver’ and ‘Daniel investor’ as an example.

John Saver vs Daniel Investor: A Case Study

Both men are the same age, working for the same company and earning the same income. They both have no debt, and very little in terms of assets. However, they are at a point where they understand the importance of putting aside money for their future. They feel that they need to save $1 million by the age of 60 to be able to retire comfortably.

 

John Saver:

• Age: 40
• Annual Salary: $100,000 USD ($8,333 pm)
• Current Savings: $100,000 USD
• Savings Goal by 60 (Retirement): $1,000,000
• Required Monthly Contribution: $3,750

John is already 50% through his working life but has only managed to save one tenth of the amount he needs to retire. To get to the desired $1 million, he needs to put away $3,750 per month into his bank account for 20 years.

The problem is that John has always been a bit of a spender. It might be very ambitious and quite challenging to change that suddenly and put away almost 50% of his salary towards savings.

As a result, John often fails to either set aside the total amount or dips into his savings as unexpected costs arise.

Daniel Investor:

• Age :40
• Annual Salary : $100,000 USD ($8,333 pm)
• Current Investment: $100,000 USD
• Investment Goal by 60 (Retirement): $1,000,000
• Required Monthly Contribution: $2,000

Daniel is also in a similar position. He is already 50% through his working life and has only managed to save one tenth of the amount he needs to retire. However, Daniel decided to set up a savings account aimed at investing regularly. To achieve his retirement goal of $1 million, he will have to contribute $2,000 per month.

This money is directly debited from his account the day after his salary is deposited as a disciplined action. Therefore, he doesn’t even have a chance to notice the money gone.

Daniel’s funds are then actively invested and managed. They are now benefiting from the wonderful wonders of compounding interest. This means he is taking full advantage of accumulating interest on top of accumulated interest for all the years he is investing.

Let’s put compounding interest into perspective. Daniel’s initial deposit of $2,000 will be worth $5,300 at the end of the 20-year term! At the same token, his first year’s contribution of $24,000 will be worth $63,700 by the end of the term*.

As a result, Daniel can continue leading the life he enjoys. He can keep the small luxuries and current lifestyle, knowing he is well on the way to achieve his retirement goals.

In fact with the additional spending money that he is left with every year, Daniel is planning on taking a three week holiday travelling around Europe later this year and will be on track with putting a down payment on an investment property this time next year.

If Daniel decided to contribute the same amount to his investment plan as his friend John, he would have a whopping additional $787,000 in his pension pot by the time he was ready to retire.

So ask yourself… Do you want to work smarter, or harder? Are you John or Daniel?

* This projection is based on illustration purposes. If you decide to set up any structured savings, the term should be determined by affordability and time scales in the UAE. A short-term plan may suit you better.

Following on from us covering the difference between Saving vs Investing and with so much reported on the recent market movements, it would be important to highlight why and what the impact is of investing at the right time. Also what the true effect is of continuing to use purchasing power over time to ultimately add value to your portfolio.

While much information circulates in our community regarding the impetus to buy good value stock, equity or units in funds, there is one classical item which could use attention with respect to the value of buying during corrective periods. That item is the power of Dollar Cost Averaging over time.

When you create and review a set of dollar cost averaging numbers, it becomes apparent that during these periods of severe price decline or correction, accompanied mental exhaustion, great wealth is made.

Illustrated below are two hypothetical price performance periods using gold as an example:

 

 

Gold Scenario A: depicts a 12-month period of increasing gold prices compounded at a 2% rate, producing a total of a 24% “bull run”. Gold Scenario B: depicts an extremely painful 30%+ correction and subsequent recovery to starting-point levels over a 12-month period.

At first glance, you might assume an investor gained 24% under Scenario A and nothing under Scenario B except for potential losses and grey hair. A closer look at a set of dollar cost averaging data however, tells a wildly different story.

Let’s assume an investor has the courage to create and execute a $1,000 a month investment program towards buying units. In applying that program to the two scenarios laid out above, a fascinating result begins to emerge:

 

 

As the numbers demonstrate, Scenario A’s 24% “bull run” produced a pitiful return on capital, and as a headline figure was very misleading. A disciplined investor allocating $1,000 a month under this scenario, saw a total real gain of only 12% at the end of the twelve month period.

Under Scenario B however, our disciplined investor’s $1,000 a month investment program produced a total real gain of 28% on his or her capital, in what could be described as a “sideways” (or unprofitable) unit price environment.

What’s also interesting to note, is that not only did Scenario B produce a far greater gain, but it does so at a (counter-intuitively) much lower risk.

To illustrate, let’s assume that at the end of the 12-month period Scenario A suffers a “minor dip” in price, returning to its initial starting level at $1,000 per unit. Let’s also assume Scenario B jumps by 24%, effectively switching places price-wise with Scenario A. Here is a chart of that price swap:

 

 

As mentioned, while this price swap appears to be just a “minor dip and corresponding jump”, as the numbers will indicate, the risk of financial loss in Scenario A becomes staggering, while the upside gains under Scenario B become equally explosive:

 

 

As demonstrated, a correction to starting point in Scenario A produces a real total loss of 10%. A price swap in Scenario B on the other hand (i.e. a move from $1,000 per unit to $1,243 per unit), produces a 59% total gain. Therefore, the disciplined investor who continued to allocate $1,000 a month in the face of a frightening 30% collapse, was rewarded tremendously.

The moral of the story here is to continue to add fresh capital to your investments during declines. And it doesn’t have to be in just one Fund you can utilise those Funds surrounding Commodities, Healthcare, Technology or Shares of Companies.

Additionally, when struggling through the corrective depths of any asset’s “Scenario B”, it’s important to ensure that whatever you’re accumulating has real (and strengthening) fundamental value. Therefore, the longer the corrective period persists the greater will be your ultimate upside in the subsequent recovery. In other words, with strengthening fundamentals time is labouring for you rather than against you.

Bottom Line: The discipline of incremental investment over time may position one for explosive upside gains and reduced downside risk. Ensure that whatever is being accumulated however, is fairly priced, and of increasing fundamental value.

We would like to share with you this excellent article on the power of the compound interest, published by Canterbury Property Services back in 2017.

One of the most important subject when it comes to saving  – Compound Interest. No matter what your age, now is the time to begin saving for retirement.

The rich are not rich because they earn a lot of money; the rich are rich because they saved a lot of money. Those who become wealthy do so by spending less than they earn. There is no other source of saving and by extension, of building wealth.

If saving is the key to wealth, then time is the hand that turns the key to unlock the door. There is no reliable method to quick riches. There are however, proven methods to get rich slowly. If you are patient, and if you are disciplined, you can produce a golden nest egg that will hatch later in life. It might appear that the pittance you save now could not possibly make a difference, but that is because you haven’t considered the extraordinary power of compound interest.

The power of compound interest

The best way to ensure your future financial success is to start saving today, even if all you have seems like a paltry sum. The amount of capital you start with is not nearly as important as getting started early. “Procrastination is the natural assassin of opportunity. Every year you put off investing makes your ultimate retirement goals more difficult to achieve.”

The miracle of compound interest is the secret to getting rich slowly. Even modest returns can generate real wealth given enough time and dedication, but mainly time.

On its surface, compounding is innocuous, even boring. “So what if my money earns less than 3 percent in a high-yield savings account?” you may ask. “What does it matter if it averages 8 percent annual growth in a mutual fund? Why is it important to start investing now?”

In the short-term, it doesn’t make a huge difference — but don’t let that fool you. On the slow sure path to wealth, we need to keep focused on long-term goals. Short-term results are not as important as what will happen over the course of 20 or 30 years.

The growth of annual $5,000 contribution

Compounding can be made even more powerful through regular investments. It is even more exciting to see what can happen when you make saving a habit. If you were to contribute $5,000 annually to a structured plan for 45 years, and if you left the money to earn an average 8 percent return, the retirement savings would grow to more than $2 million, as you can see from this chart:

 

 

A golden nest egg indeed! You would have more than eight times the amount you contributed. The dark green part of the chart dwarfs the light green, which is the money you have put in.

This is the extraordinary power of compound interest!

The cost of waiting one year

It’s human nature to procrastinate. “I can start saving next year,” you tell yourself. “I don’t have time to start — I’ll do it later.” But the costs of delaying your investment are enormous and even one year makes a huge difference.

The difference is so dramatic when you look at what you lose by waiting a year even though you regularly contribute to your savings. If you make annual contributions of $5,000 to your structured plan as shown in the example, waiting just one year will cost you more than $150,000! That is probably more than your annual income.

 

 

There is another way to look at the cost of delaying. If you still wanted to have a $2 million nest egg at age 65, but you wait five years to get started, the annual contributions would have to increase to nearly $9,500 — that’s almost double. If you were to wait until age 40, you’d have to contribute nearly $55,000 a year.

 

How to get rich slowly

You can make compounding work for you by doing a few simple things:

1. Start early. The younger you start, the more time compounding has to work in your favour and the wealthier you can become. The next best thing to starting early is starting now.

2. Make regular investments. Don’t be haphazard. Remain disciplined, and make saving for retirement a priority. Do whatever it takes to maximize your contributions.

3. Be patient. Do not touch the money. Compounding only works if you allow your investment to grow. The results will seem slow at first but continue on. Persevere! Most of the magic of compounding returns comes at the very end. Compounding creates a snowball of money. At first, your returns seem small; but if you are patient, they will become enormous.

We would like to introduce you to our client Jennifer Gonzalez-Diaz, Sales Manager, Digital Content at DU Telecommunication. In this interview, Jennifer shares her experiences about her critical illness journey, the impact on her life and the importance of protection.

 

Q – So Jen, what protection have you taken out?

JGD – we’ve taken the Life Insurance protection which includes Critical Illness as part of that Life Insurance

 

Q – Why did you take out the protection?

JGD – It was a decision I made with my husband because we’d just had a baby and thought that having protection wasn’t only something that was good for us in case of any issues but for our baby boy. This was in case of anything happening to both of us that the family would have some sort of protection that they wouldn’t feel the financial burden. So, it was really to think about planning for the future, without one of us or even without the both of us that the family would not feel the burden.

 

Q – You met with James McMullan one of the Financial Planners at Alpha. How did you feel about James in addressing your requirement?

JGD – James was great in addressing our requirement. In fact, it was more of an eye opener for us during the first discussion with James. This was because Life Insurance was something that I was getting from my employer, as part of a cover that my work offers.

It wasn’t necessarily something that I thought would be needed as an extra or an add-on for my husband, but James listened to whatever we had. He also listened to our financials, future plans and our family plans. He looked at more than just the numbers, he just heard us and listened to everything that we had to say regarding our family plans and as a conclusion, he gave us several options. Each and every one of these options was tied to our plans it wasn’t just something that was generic, it was very specific to our needs.

The Life Insurance in particular was very much of interest because we had just had a son and as a priority, thinking about the future of our family and potentially anything happening to us, it would really make sense to have Life Insurance in place, especially because it included Critical Illness.

Although we always think that we are going to live a long and happy life, which we always wish for and hope for, we don’t actually foresee anything negative happening and this type of planning has really helped us to prevent any major obstacle financially in case of any bad luck arising.

 

Q – You took the insurance out in May 2017, has anything happened since you put the cover in place?

JGD – Yes, so in May 2017 we took the insurance which was a couple of months after having our baby boy and just over three months later believe it or not I was diagnosed with Breast Cancer.

I remember it was on the 8^th of September 2017 that I went for a breast ultrasound, which I then had to have a breast mammogram and then a biopsy. A few days later came a conclusion that it was Breast Cancer.

I have always been healthy, a very healthy lifestyle, never smoked hardly drank and as opposed to some of my friends who do smoke and drink. It was however me that was told at the age of 34 with a baby only a few months old you I am now having to face the biggest challenge of my life, so yeah that’s the big thing that happened.

 

Q – When this all happened did you receive any support from James and AOP, or was it a case of you getting on with it on your own?

JGD – No, Not at all. It wasn’t a case of us having to deal with things on our own, James spoke with my husband after finding out that I had been diagnosed with Breast Cancer.

James said to us don’t forget your Life Insurance has Critical Illness included. In those moments you don’t actually think and forget everything that you have. You don’t remember the specifics of whatever contracts you have negotiated purely because you’ve got bigger things to worry about.

James was there all along to ensure that we were supported; and he took everything into his hands. To check whether my case could be filed under the Critical Illness cover and managed to speak with all the relevant people. We got support from the beginning to the end. From filing the request to check whether or not the case would be accepted by Zurich to looking for all the information from the medical experts. Everything was taken care of by James.

 

Q – I take it then from that answer you did get paid the Critical Illness cover?

JGD – So we got the cover allocation from our insurance given to us, paid into our account very quickly. It was a matter of days really after the claim was successfully accepted. It was literally a matter of days for us to see the amount deposited into our account.

 

Q – Having that money paid out, did it give you a sense of ease, put your mind at rest that you didn’t have to worry about expenses?

JGD – Absolutely, for all of those who live in the UAE, we all face the same challenge which is that we all have medical insurance because it is compulsory, which is great. But potentially those insurances may have a cap on treatment. My medical insurance did have a limit amount on it and it’s something that we should keep in our mind that there could be a cap included.

Critical Illness cover especially is great because it gives you peace of mind. If you need access to additional treatment outside of whichever country you find yourself in, the treatment can be made available to you, which may not be if you do not have additional cover or money available in your pocket.

Also if you don’t need that money straight away it helps to essentially not think about financial concerns, if anything was to be escalated and you had to look for further options you know that you’ve got that amount of cash in the bank for that purpose.

 

Q – A pretty obvious answer coming up I think, but in hindsight are you glad you took the insurance when you did?

JGD – Yes, absolutely I am and I definitely recommend anybody taking the same sort of approach. It does seem like a significant commitment and it is something that you can’t take lightly. But, we will at some point, we are not immortal so we will face death sooner or later, hopefully it’s later and if it happens sooner or whenever, you need to have the peace of mind that you’ve got a structure and financial support to back you up and back your family up. So, yeah definitely glad to have taken that.

 

Q – Important to point out at this stage that you look really, really good. You look strong, you look healthy. Ok, your hair is a little shorter than we are used to seeing you with but it hasn’t been like that all the way through. How did your life change from September 2017 until now, what’s happened over the last 10 months?

JGD – A lot has happened, I went through a number of treatments. Sessions of Chemotherapy first, followed by undergoing breast surgery with immediate reconstruction and followed by 25 sessions of radiotherapy which was then followed by a series of continuous, what we call targeted therapy treatment which is what I am still going through now. So, essentially a series of treatment every two or three weeks or potentially every single day of the week.

Physically weight gain with steroids feeling extremely weak being prone to lots of different virus’s and diseases due to weaker immune system.

However little by little losing hair from not only my head but eyebrows and eyelashes which makes you feel less of a person, sometimes you can’t even recognise yourself. So a lot has happened but a lot has changed since, I am stronger now and feel stronger now and I am now what they call no evidence of disease, so there is no evidence of disease at it stands today and I am still in active treatment.

By the way, the money from the insurance has helped me because I did reach my medical insurance cap, but I feel strong, I have energy back and back to an exercise routine, so you could say a lot has happened in what is less than a year.

 

Q – It sounds like at the moment it’s all good news, things are moving in the right direction, how does that make you feel?

JGD – it makes me feel great, it was definitely a great start to the whole rollercoaster to have that financial cover sorted straight away for me from the beginning and it was really a peace of mind. The last thing you want to think about when you are being told that you’ve got such an illness is to worry about the financial side of it and when you don’t have to worry about it, it’s a huge weight lifted off your shoulders.

 

Q – Is it fair to say that because of the personal approach and support you would recommend James to any of your colleagues and friends ?

JGD – Yes, without a doubt. I have already introduced James to some of my friends to help with their own cover needs and will not hesitate to recommend him again.

 

Q – so finally then, if you were trying to raise awareness and had a message for anyone else, whether it be a husband and wife, a family or somebody on their own that were not sure if they should be taking cover out for themselves, what would that message be ?

 JGD – Don’t think about it twice just go for it whether you do have a direct family i.e. wife, husband, kids or not. Your life might change at any point in time. You should make sure that money is the last thing you worry about, if your life does change because of a Critical Illness.

Yes, you might be in the best shape you’ve ever been, or you’re not quite sure and you’ve had some issues, don’t over think it just go for it. It’s something that will come out of your bank account on a monthly basis easily; it’s a way of investing in yourself, in your own future without having to think about keeping the cash in a bank account. Put it into a structure that will help at any point in time to give it back to you when you need it, so just go for it.