The Guaranteed Savings Plan I Took For My Daughter
Case Studies, Financial Planning In Dubai, Saving For College, Savings Plans

The Guaranteed Savings Plan I Took For My Daughter

On the 28th of April 2016, I started a savings plan to save money for my daughter’s higher education fees.

As an independent financial advisor myself, I was faced with the decision of choosing between all the different providers of savings plans that are available in the market.

I used the following factors to evaluate and choose the best savings plan for me.

Principle Protection

  1. The S&P500 Index savings plan from Investors Trust is one of the two principle protected plans available in the U.A.E., that are ‘principle protected’.
  2. ‘Principle protected’ simply means that my capital is assured. The S&P500 Index savings plan assures that at the end of the term, the capital plus 40% (140%) is assured as the worst case scenario.

Fine print – This is subject to me contributing all the premiums over the full term.

This means that I have to ensure that I don’t miss any premium at all. While this may seem inflexible, I can pay future premiums in advance to avoid losing the guarantee.

I prefer this plan over other plans in the market, that provide no principle protection whatsoever. Moreover, with other savings plans, I could get back less than what I invested.

Market Participation

This product provides me with 100% market participation. This means that I get the actual performance of the market without any limits on the growth.

Underlying Investment

  1. Other savings plans in the market such as Vista from Zurich International Life, or Premier Advance from Friends Provident International, or Vision from Generali International, etc…, offer mutual funds as the underlying investments.
  2. While there is nothing fundamentally wrong with mutual funds, the fact remains that mutual funds are subject to market risk and have to be chosen correctly. The key here is ‘mistakes happen’ when selecting mutual funds.
  3. Wrong choice, now or in the future, could lead to losses in the portfolio.
  4. The S&P500 Index savings plan offers the S&P500 index as the underlying investment choice.
  5. There is only one variable that could affect the performance of the portfolio, which is the S&P500.
  6. This plan works without intervention from the plan holder or the financial advisor.

The advisor cannot make mistakes, causing you to lose money.

The S&P500 is simply a numerical index that gives the average performance of the top 500 stocks in the US stock market. I like the simplicity of this investment.

I don’t have to pick and choose anything where ‘mistakes could happen’.

Moreover, Warren Buffett himself advocates the S&P500 as the best investment to everyone including himself.

Not only that Warren Buffett has famously wagered a million dollars on the performance of the S&P500 over the best hedge funds in the world – Protege Partners.

This was a 10-year bet which is into its 8th year and Warren Buffett is right so far. The S&P500 has beaten the hedge fund in overall performance in the past 8 years.

Performance of the S&P500 Index

Historical performance matters even though it may not be an indicator of future results. All I did was look at the 25-year performance of the S&P500, and my mind was made up.

The S&P500 has averaged 12.98% per year over the last 25-year period.

Charges

There is a saying in life that you get what you pay for. This product is slightly more expensive as compared to the other savings plans in the market. But there are three factors that made me choose this product over the others.

  1. Principle protection of 140% which the other products don’t have, and
  2. Index fund – S&P500 that has actually outperformed any of the funds in the market over 25 years.
  3. Warren Buffett (one of the richest man in the world recommends it)

Term – (number of years)

The S&P500 Index Savings plan is only available for a term of 15 years. While others might find this unsuitable for their savings and investment goals, I found this perfect for my goal of saving for my daughter’s education.

She is 3 years old and I have exactly 15 years before I have to shell out approximately USD 320,000 for her higher education fees.

Specifics of my investment

My investment details are as below:

  • Monthly Contribution – USD 1,000
  • Term – 15 years
  • Total contribution – USD 180,000
  • Minimum Guaranteed amount (after 15 years) – 140% i.e., USD 252,000 or actual market performance.

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Financial Planning In Dubai

How To Make Financial Planning Work For You

In this fast paced life, people often tend to overlook small things and issues which sometimes have a significant impact on our life. For example, planning one’s finance financial-planning-processseems to be a trivial issue, but it is one of the vital factors that affect life.

People ensure that the finances of their business are maintained and monitored regularly to avoid financial crisis, then why do they overlook planning their personal finances as well. Is it just because they are not accountable for their personal goals to anyone and they believe in spending until they are earning. Just as in business, isn’t it important to lay a solid foundation of your finances for the wellbeing of you and your family – it is.

It is said that ‘Hope for the best, But plan for the worst’. This is true for personal finances also. A person may be having a well paying job and earning well enough to cover his expenses but what will happen when he plans to buy a house, get married, and have kids or the worst lose his job. The uncertain nature of life increases the importance of financial planning. Financial planning means planning one’s investments in a manner to meet the financial goals. It is an analysis of how much a person earns, budgets, spends, and saves; also where his money is expected to come from, how it is going to be spent, saved and what returns will it earn in future.

Basically, a person needs to evaluate if his net worth is increasing because net worth is one of the best measures of financial health and easy to detect if a long term problem is emerging. To evaluate net worth, simply, reduce what a person owes to others (liabilities) from what he owns (assets). Even if there is no increase in the assets and the person is paying his debts, it can be said that the net worth has improved. A decrease in the net worth is not always bad, provided that the causes of decrease are known. For example, if there is an increase in debts due to an education loan for the child it will decrease the net worth but it’s not bad.

Financial planning is simple and meaningful if it is done properly. Here are some steps to ensure a sound financial planning-

  1. Make a list of financial goals – These can include long term goals like saving for retirement or short term / time bound goals like buying a house in 3 years. Ensure that the goals are realistic.
  2. Assess Current financial situation – It’s like making a personal income and expense statement. List out all the cash inflows (from where money comes) and cash outflows (where the money is spent). It will also give a clear picture of how much money is utilized and how much is going into investments.
  3. Understand risk appetite – Risk appetite is the amount of risk a person can bear while investing. Risk appetite for a person having a family will be different than a bachelor who has just got a job or a person who will retire soon. The type of investment will differ according to the risk appetite.
  4. Planning – Planning is done to cut down unnecessary expenses if a person is spending more than he is earning. Planning for investments is also done so that the financial goals are met.
  5. Execution – Mere planning is not enough, the plan should be executed also. Help of advisors, accountants, financial planners, lawyers can also be taken to ensure more apt investments.
  6. Monitoring and reviewing – The financial plan must be reviewed regularly for its performance and to incorporate changes. If it is found that the returns are not as expected, changes should be made. It is said that the rate of return from investment should be more than the rate of inflation at any time.

Personal financial planning is a judicious mix of earning, budgeting, saving and planning so that a person is capable of facing any economic crisis that occurs.

 

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Financial Planning In Dubai

Why financial planning is similar to running a marathon

When you see Usain Bolt sprinting, it is like a flash in the pan. He springs up and off he goes flying towards the finish line. Mo Farah and other acclaimedmarathon long distance runners on the other hand are more about maintaining a steady pace. Watching them run is more about consistency and endurance. Believe it or not, achieving your financial goals is very much like running a marathon. It requires the same dedication, patience and commitment as a marathon.

Some of your goals are short term and others medium and long term. So the whole process of investing for goals is an ongoing and continuous process and not just a few transactions. What you need to remember is that your objective is not being the fastest runner over 100 metres or even 200 metres but to maintain a steady pace and win the 5 km or 10 km marathon.

What you need to look at is building up the stamina to complete the long distance race. In other words, making a fast buck by churning your mutual fund or stock portfolio, getting in and out of investments while trying to time the markets may reap you rewards in the short term, but in the long term such steps hardly matter and may actually be detrimental.

Set your goals, priorities them and develop an asset allocation strategy based on which you invest your money.

1. Pick Liquidity first for short-term goals If you have goals like a loan that has to be repaid, a vacation, down payment of a house or car coming up within the next 18 months, put money aside for this in liquid assets like short term or ultra short term debt funds. Besides this have 2-3 months of expenses always in a liquid fund to deal with any kind of emergencies. But ensure that you don’t have too much; if there is more than 2-3 months expenses lying in your bank account or these liquid funds, then your funds are idle.

2. Try to link assets/investments to goals long term assets like EPF, PPF should be used for goals like retirement. Invest in mutual funds for a goal like child’s education and don’t touch this investment for anything else. Maintain that discipline.

3. Aim for appropriate returns where your real return is atleast positive. i.e. when you deduct the effect of taxation and inflation from the return earned, there is still something left!

4. Understand the risk return payoff. For higher returns you have to take higher risks no way around it. Having said that some risks have to be taken where meeting the goal is of utmost importance.

5. Don’t get into a trap of over analysing. Hindsight is always perfect. Learn from your mistakes and move on.

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Financial Planning In Dubai

How To Find The Best Financial Planner in UAE

You want to make sure you hire the best financial advisor possible so before you hire a financial advisor, do your homework. Read through each of the steps below, conduct a search for advisors that meet your criteria, interview several, and verify their credentials and background before you hire them. Following these steps will help you hire the best financial advisor for you and your family.

1. Understand the Difference Between Financial Planning and Investment Management

Some financial advisors offer financial planning services but not investment management; others manage investments, but provide little financial planning. To find the best financial advisor for your situation you need to understand the difference, and know which services a financial advisor provides before you hire them.

2. The Best Financial Advisors Have Credentials

All credentials are not alike. To find the best financial advisor, look for a financial advisor who has their Certifications.

3. Know How Financial Advisors Are Compensated

There are numerous ways financial advisors can charge, but in UAE, they are compensated by the provider.

4. Verify Your Financial Advisor’s Credentials

The best financial advisors have a clean compliance background and verifiable credentials. To be sure they are who they say they are always verify a potential advisor’s credentials and compliance (legal) background before you hire them.

5. Avoid Fraud – Only Use A Financial Advisor Who Uses A Third Party Custodian

This is one of the simplest steps you can take to reduce the chance of fraud. The best financial advisors will use what is called a third party custodian to hold your assets.

6. Find The Best Financial Advisor By Asking These Questions

You can find the best financial advisor by asking above questions when you interview advisors. These questions help you determine how the financial advisor communicates as well as their area of expertise and ideal client.

In short, financial planning is not a short term process, it is a process which needs to be reviewed at least once in a year. A good financial planner can make big difference in the end result of planning.

If you have more questions ask me here.

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Financial Planning In Dubai

Why do you need a financial planner in UAE?

As a child my family went on a number of driving vacations. Before leaving, my parents generally contacted AAA and obtained a step-by-step series of maps of our planned route. Typically, each page depicted the route between two major cities: the route from Dubai to Abu Dhabi, followed by Dubai to Al ain, and so on.images

Reaching your financial goals is like a trip. While there are many reasons you need a financial plan, here are six to get you started:

If you don’t know the destination, how will you know when you’ve arrived? A financial goal is something that has a time frame and that can be quantified. An aspiration such as a “comfortable retirement” is hard to plan for. The financial planning process will help you define and quantify your goals.

Determining a proper investment allocation is critical. An outgrowth of your financial plan should be a plan for the allocation of your investment assets across all of your accounts. The allocation should reflect the goals you are trying to attain as well as your tolerance for investment risk.

Are you saving enough? Whether you want to fund your children’s college education, save for retirement, or buy a new house, most financial goals mean periodic savings. The financial planning process will help you identify how much you will need to save periodically—and in total—for each of your goals.

What will happen to your assets upon your death? Most of us have someone to whom we would like to pass on whatever wealth we have accumulated during our lifetime. Estate planning is a central part of the financial planning process. Do you need a will or a trust? Are your beneficiary designations on retirement accounts and insurance policies up-to-date? What would happen to your assets if you died today? Is this what you intended?

Are you properly insured? Do you have enough life insurance, and do you have the right kind of policy for your situation? Do you have disability and long-term care insurance? Do you need this coverage? A financial plan addresses all of these issues.

Are you fully using all of the benefits available to you through your employer? This question addresses issues from health insurance all the way to your retirement plan to any types of stock options or company stock benefit you may have access to. Benefits generally range from 10 percent to 30 percent or more of your cash compensation, so understanding what is available to you and how to best use these benefits is crucial.

These six reasons barely scratch the surface of why you need a financial plan. In general, the financial planning process can help you take a thorough look at all aspects of your financial life and organize them in the most efficient fashion for your situation.

Finally, do you need to hire a financial planner to do all this? My answer is yes. What a good financial planner will do for you that you cannot do yourself is to take an objective, unemotional look at your situation. He will then apply his expertise, training, and experience to your unique financial needs.

Remember: Financial planning is not a one-time event, but rather an ongoing process. The plan is a base from which to make financial decisions, but the plan can and should change over time based upon changes in your personal circumstances.

What are some other benefits of a financial plan? We’d love to get your thoughts—feel free to leave a comment below.

 

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Financial Planning In Dubai

10 financial planning steps newlyweds should take

newlyweds-financesGetting married is one of the most important events in your life. There is so much to consider flowers, jewelry, dresses, venue, photography the list goes on. Once you are back from the honeymoon, a new phase of life begins and also begins the challenges of managing the finances of a new household with your spouse.

In recent studies, many couples ranked financial matters as one of the most essential factors when it comes to happiness in a marriage. It is one of the key factors causing marital stress.

1. Check money compatibility

First thing to do is to check how compatible you and your spouse are in money management. You may be conservative and your spouse may be aggressive. You may think that the best place to invest is stock market and your spouse may think bank FDs.

You should communicate your money management style to your spouse; as well as you need to understand the money management style of your spouse. Also both of you need to analyse the merits and demerits of each other’s money management style. Then you need to create a mutually agreed combined money management style.This will be vital to you both throughout your married life to help minimise stress from disagreements about money.

2. Update your records

  • Change of address: You could have shifted to your spouse’s place or both of you could have shifted to a new place. So you need to make necessary change of address requests to your bank accounts, investment accounts and so on.
  • Change of name: Generally women change their initial or the last name after marriage. This needs to be updated in all the accounts.
  • Change of nominee/beneficiary: You may like to change the nominee to your spouse for the investments, accounts, insurance policies which you have taken before marriage.
  • Changes in will: You also need to create a will if you have not created one so far. If you have already a will, then you need to revisit your will now.

3. Assign financial responsibilities

You need to decide, who is going to take care of day to day money management i.e. paying bills, monitoring investments and the likes.

4. Develop a family budget

You need to create a workable budget for your family that gives extra money and life. This budget should take into account your incomes, the individual expenses and family expenses.

5. Create an emergency fund

You need to accrue savings for some surprise situations like loss of job, break in job or sudden expenses like a major repair to your car or house. Generally, the emergency fund needs to be in the range of 3-6 month of family expenses.

6. Insurance coverage

So far, you may not be having any dependents or less number of dependents. You could not have considered life insurance or take for a less coverage. This is the time to look at life insurance seriously. When I say life insurance, I am talking about only term insurance and life plans.

7. Debt payoff plan

If you are already on debt, you need to create a debt payoff plan. This plan will help you in getting out of debt and staying out of debt.

8. Spend smarter and save more

Spending habits will be different from individual to individual. Both of you need to align your spending pattern and learn how to spend smarter and save more.

When both are working and not having kids yet is the stage you have more income, especially more disposable income. Couples need to be careful and avoid overspending and save as much as possible during this stage. This will ease you out when you have more expenses at the later stage of your life.

9. Set combined financial goals

Both of you need to spend some quality time discussing about the financial goals like buying a home, international vacation and the like. This is the right time to plan your retirement.

10. Chalk out a financial plan

Once you have set the combined financial goals, then you need to chalk out a financial plan to achieve these goals. You need to take into account growth rate of your income, inflation on your expenses, time set to achieve various goals, rate of return expected from various investment options.

This is slightly a complicated procedure and this plan need to be review periodically. That is why it is better to outsource it. You may seek assistance from a professional financial planner.

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Financial Planning In Dubai

3 Steps to Become Financially Independent

Financial independenceFinancial independence is something everyone desires. The earlier we attain it the better. Most of you think that to attain financial freedom, all you need to do is just put in a more hours of work a week. That is not the case. Putting in more work alone, could not guarantee financial freedom to a person. You need to do much more than that to live a life of financial freedom and that too as soon as possible.

Actually, there are a few ways in which we can achieve financial independence. Though it sounds rather simple, these methods will help you achieve financial freedom in life

Step 1- Start Saving

The first step to financial freedom flows from your ability to save as much as possible from the income you get. Without developing a healthy habit of savings, you cannot enjoy financial freedom. If you are overspending and do not save, no amount of income is going to satisfy you. You will live a life of a pauper even if you are earning a 6-figure salary.

Life is hell for a person earning high income, if he has no plan to save. How much more will it affect someone who has only just started to work and is getting only fresher’s salary?

Make saving your second nature. If you are someone, who is only starting on in life then make sure you start saving as soon as you get your first salary. Don’t decide to start saving after a year or after getting married. Start saving from day one. Once saving becomes a part of your character, you would automatically find avenues to save money. It becomes programmed in your brain. Then, it really becomes fun for you to find ways to save money as much as possible.

Most of us are tempted to enjoy life during the first few years before we start saving. After all what is life without some fun? But that is a big mistake. Once you fall into an extravagant life style, then it is hard for you to adjust to simple living latter on. Therefore, it is wise if you start saving early on. It will help you to live below your means and when your salary increases you won’t be forced to raise your spending to match your salary hike. You will be able to save that much money.

Step 2 – Add More Income Sources

To be financially independent you need to continuously bring in revenues. Only this will ensure you financial freedom as soon as possible, especially when your present income is not much. If both husband and wife is working, always see to it that income from husband or wife goes into saving and take care of your expenditure from what you get from one jobs. If you are single or If you have any other talents like writing, drawing, music etc., then you could make an income out of it. You could write as a freelancer or sell your drawings etc. Those who have talent in a musical instrument can make extra bucks by teaching others. Turning your talent in to money helps you to bring in extra revenue and also a chance to pursue your passion

Step 3 – Invest Your Surplus

Money is idle and loses its value if it stays idle. So invest your savings in assets that gives you good returns. When you invest, do not go about investing in every high risk asset and definitely do not invest in something because someone just told you. Poor investment decisions is worse than not saving. This is because you stand to lose your money without getting any returns by foolish investment decisions.

The best way to invest is to invest in a portfolio, which contains assets that are high yielding but risky and in assets that gives low returns but are less risky. Make detailed research on these investments and invest wisely.

Do compounding when investing your savings. If you have a steady job, the only way you could make lots of money is by doing compounding investment. It means you must reinvest your returns from the investment. This helps you to increase the amount of money you invest and thus gives you higher returns.

These are often repeated words. You must realize that there are not short cuts to become financially free. You must struggle hard and follow the time tested ways that we have outlined here. For someone who is determined and has a will to succeed these methods is all that he needs to become financially independent at an young age.

We love your comments and questions. Please feel free to add one below.

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Financial Planning In Dubai

Why and How Much Should You Save for Emergencies?

Saving for Emergencies

Do you put aside money for emergencies? Are you prepared for a rainy day? How would you meet your expenses if you were laid off from work or between jobs for 6 months or more? These are some of the questions I ask expats who approach me for personal financial planning. Some save money regularly, the majority don’t, and the reason for this is that they don’t have a specific number to work towards for their ‘Emergency Savings’ goal.

6-month Emergency Fund
6-month Emergency Fund

Why and how much should you save for emergencies?

Do you own a home?

If you own a home, especially on mortgage, there is a good chance that at least 15-30% of your income is going towards mortgage payments and maintenance of the home. Losing a job or being involved in an accident can cause a sudden dip in your family income and bank balance. In this case, your emergency fund should at least add up to 7-8 months of monthly expenses.

How old are your cars?

Old cars cost more to maintain and can breakdown suddenly with higher maintenance bills. Moreover, they will mostly be written off in case of major accidents as their insured value will be next to nothing. Replacing your car at this stage will make quite a dent in your bank balance. 6 months of expenses is a wise choice to put aside in this case.

Is your job stable?

This is probably the biggest factor in determining the size of your emergency fund. Freelancers, self-employed, and seasonal and contract workers definitely need to put aside at least six months of living expenses in the bank to cover slow business months or periods of unemployment. If you work in a more stable 9-5 environment or in a high-demand industry where it will be easy to find a new job in the event of a layoff, three months of expenses might be enough.

Are you well-insured?

Critical illnesses like heart attacks, cancer, multiple sclerosis, renal failures, etc., can strike as you get older. If you don’t have health insurance or at critical illness insurance, how would you take care of treatment costs and hospitalization expenses? If you cannot work because of this illness how would you cover your monthly expenses?  You may want to save up to six months of expenses at the least to cover this scenario and then still get yourself ‘Critical illness insurance’ for the major expenses.

How big is your family?

More people living under your roof means more potential for unexpected expenses. Six months of expenses should cover these expenses. On the other hand, if you’re single and have a steady job, three months of living expenses in the bank is probably enough.

These questions are a starting point in terms of determining how big your emergency fund should be. The important thing is to evaluate your life and expenses and pick a number that makes you feel comfortable. Remember, your emergency fund is there to catch you when you fall – make sure you build a big enough net!

Start saving and don’t touch your 6 month emergency fund unless absolutely required.

What are your thoughts on this topic and article? Please feel free to comment below.

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Financial Planning In Dubai

The best kept secret in the world !!!

the-best-kept-secret

Let me tell you a secret, the secret that most people do not know about, yet it is so obvious,

Our modern-day education systems are designed to produce employees, not wealthy people.

Everyone studies a profession to become an expert in his/her field of choice i.e. ‘To become a doctor, you study medicine’, ‘To become a lawyer you study Law’, ‘To become an Engineer you study engineering’, and so on for all the professions out there.

But what do all the people taking up these professions have in common?

Think about it !!!

It’s the desire to make money, or more appropriately, fulfill their desires and dreams, using the money that they make in their profession.

So, if the main objective is to make money, how many people take the time and effort to learn about ‘How to make money’ and keep it?

Personal Financial Planning

There is no formal education to teach Personal Financial Planning in today’s education system, which is why it is all too common to see individuals and families struggling with debt and finances in the UAE.

Many expats believe it is not possible to become wealthy without being a businessperson or inheriting some money. This is very far from the truth. If a person has some basic financial understanding, a plan and some discipline it is a very reasonable expectation to enjoy a very comfortable retirement and become a “millionaire” or “rich”.

I hope to help you with the first two parts, basic financial understanding and help develop a plan, the rest is up to you.

Personal Financial Planning is nothing but a method of keeping more of the money you make and using it to meet your financial goals and objectives. The way these basic well-known principles are applied, can make the difference between ‘Success and Failure’, or ‘Happiness and Sorrow’.

So what does all of this mean to you?

If you are reading this article, you are most probably an expat in UAE, who has come here specifically for a better standard of living and/or to make more money and to fulfill your dreams.

Please read my article on ‘What is Financial Planning’ to get more insights on how Personal financial planning can help you as an expat in the UAE.

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Financial Planning In Dubai

What is Financial Planning?

What is Financial Planning ?

This is the second post in the Financial Planning Basics series, if you have not read the first post you can find it here – ‘The Best Kept Secret’.

Many people want to know what is financial planning and sometimes they think that they need to be highly qualified to understand personal financial planning.

The principles of personal financial planning are really not too hard to understand and apply and consist of the following steps –

  1. Creating a Personal Balance Sheet
  2. Creating your own Financial Planning Pyramid
  3. Budgeting and Prioritising
What is Financial Planning?
What is Financial Planning?

Personal Balance Sheet

Robert Kiyosaki, the well-known and renowned author of the best-selling book ‘Rich Dad Poor Dad’, says that creating a personal balance sheet is the first and most basic step of Personal Financial Planning. Basically, you need to take stock and find out where you are as far as your current situation is concerned.

A Personal Balance Sheet is nothing but a way of calculating –

  1. Your Net Worth, and
  2. Your monthly cash-flow

Net Worth

Your ‘Net Worth’ is nothing but your ‘Total Assets’ minus your ‘Total Liabilities’. Very simply, ‘Assets’ are things that put money in your pocket, and ‘Liabilities’ are things that take money out of your pocket.

Logically it follows that the higher your net worth the more secure you are financially.

Cash Flow

Your monthly cash-flow is simply your ‘Total Income’ minus your ‘Total Expenses’ on a monthly basis. This also means that the higher your cash-flow, the more disposable income you will have to commit towards meeting your financial goals.

How to make a Personal Balance Sheet?

Since you are new to this, I can help by offering you a FREE Excel template I have created. Please download it here —> What is financial planning – Personal Balance Sheet.

If you need help in filling it, give me a shout between 8am to 5pm.

PS – Be sure to read the next post in the Financial Planning Basics series – ‘The Financial Planning Pyramid‘.

Regards,

Amit Mitbawkar
+97150-1042983

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The Financial Planning Pyramid

The Financial Planning Pyramid

This is the third post in the Financial Planning Basics series, if you have not read the previous post you can find it here – ‘What is Financial Planning?’.

The financial pyramid is the main part of the Financial Planning Process. The planning process always starts with a base plan which is a written Personal Financial Plan. Obviously, you should enlist the help of a Certified Financial Planner to help do this correctly.

The 5 main sections of the pyramid are outlined below:

  1. Protection
  2. Regular Savings
  3. Growth and Diversification
  4. Speculation
  5. Wealth Distribution
Financial planning pyramid
Financial planning pyramid
As you can see from the picture above, the personal financial planning pyramid relies on having a solid foundation of protection on which the rest of the pyramid is set up.

Income Protection

Protection, or more appropriately ‘Income Protection’, revolves around the concept of replacing income in case of unplanned events happening to you. So income replacement is nothing but insurance or you can say that ‘Insurance is nothing but income replacement’.

Medical Insurance

Medical insurance is meant to take care of immediate medical expenses for any medical condition no matter how big or small. If you don’t have medical insurance, you can end up spending a lot of money on expensive treatments.

Critical Illness Insurance

The next step after medical insurance is to take care of income replacement in case of major illnesses such as ‘Heart Attacks’, ‘Cancer’, ‘Brain tumors’, ‘Multiple Sclerosis’, …etc. Generally, critical illness benefits in most policies pay out a lump sum when any of the qualifying illnesses occur within the term of the insurance policy.

Disability Insurance

As the name suggests, disability insurance replaces your income in case of disability resulting from any type of accident.

Life Insurance

Finally, Life insurance replaces income lost due to the death of the bread-winner. Consider how many people will suffer from your death, how much they would need every month and what would be the consequences of not having adequate insurance?

Wills

Wills protect your income from falling into the wrong hands or not being distributed correctly in case of your demise.

Debt Reduction

Debt reduction is the most basic, and most important component of the Financial Planning Pyramid. If you reduce your debts by planning your spending habits, you are in fact protecting your income from loss and making it available to achieve your financial goals.

If your spending is out of control, start by taking stock of where your money is being spent. The simplest way to do this is to use the personal balance sheet I have created for you.

 

Regular Savings

The next step in the pyramid is putting money aside towards your planned commitments. Planned commitments could be any of the following.

Emergency Fund

Emergencies can happen at any time. The only way to survive without problems is to be prepared. In financial terms it means that you need to put aside at least six months of income for the rainy day, the day when you most need it in case of emergencies.

Children’s Education planning

Putting aside money for your child’s higher education fees is the best gift parents can give their children. Only proper planning can ensure that their future is secure.

Retirement planning

Financial independence during retirement is very important if you do not want to depend on someone else for your expense during the twilight years. Saving money now, to have a retirement income is the only way forward.

Home ownership planning

Buying their own house to live in is every person’s dream at some point during their life. Like other planned goals this goal can also be achieved by regular savings.

Lifetime aspirations

Life time aspirations like traveling across the world, buying the dream car, …etc also need proper planning and regular savings.

 

Growth and Diversification

This phase of financial planning should only be started once the first two phases have been taken care of. Investing in stocks, bonds, mutual funds and ETFs require proper research and slightly higher understanding of how the markets and different asset classes work.

Proper research and patience is the key to succeeding in this phase. This phase is designed to maximize the growth of disposable income through taking calculated risks.

 

Speculation

Speculation is not for the weak-hearted and generally also known as the wealth-accumulation phase of financial planning. You only think about speculation when you can afford to lose the money at stake and not be affected financially.

Different ways of getting into the speculation phase of investing are by investing into high-risk asset classes such as ‘Futures’, ‘Commodities’, ‘Forex’ and ‘Real Estate’. Yes !!!, Real estate is a high risk asset class, because mostly the amounts at stake are high and almost anything can affect the property value.

 

Distribution

Distribution of the wealth built-up during the lifetime is the final stage of financial planning. This can be achieved through proper estate planning and succession planning.

 

What next?

The next step in the financial planning process is called Budgeting and Prioritizing.

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Financial Planning In Dubai

Budgeting and Prioritising

Budgeting and Prioritizing

This is the fourth post in the Financial Planning Basics series, if you have not read the previous post you can find it here – The Financial Planning Pyramid

Regardless of the number of goals a person has, it is seldom possible to start trying to achieve all of them at the same time.

Sometimes the monthly cash flow acts as a deterrence and sometimes the timing of each goal comes into play as most goals will need to be achieved at different times in a person’s life-cycle.

budgeting and prioritising
Budgeting and Prioritising

Budgeting

Budgeting as the word implies revolves around setting realistic targets or limits on different categories of expenses that a person incurs in a month. But setting a budget is not as difficult as it sounds.

Steps to set a Budget in your own finances

  1. Firstly, start by itemizing all your expenses or rather outlays of money for a month or two.
  2. Maintain a Microsoft Excel file for this purpose.
  3. Download a template from here if required – Budget Planner
  4. Try to establish an optimum amount for each expense based on past data that you would accumulate in the excel file.
  5. Set realistic expense targets for each month going forward.
  6. Review your ‘expenses’ every week to see if you are on target.
  7. Make adjustments when necessary.

Prioritizing

This is the holy grail of personal finance. If you can learn how to prioritize in a completely disciplined manner without giving into everyday shopping temptations – let me know how !!! It’s not easy, especially in Dubai which is a shopper’s paradise.

Nevertheless, it needs to be done. Here are two ways to prioritize.

Prioritising your expenses – Method 1

Ever wondered what is the difference between what the ‘Rich’, the ‘Middle Class’, and the ‘Poor’ buy with their money on payday?

Think about it for exactly 3¼ minutes and come back to this article.

  • The ‘poor’ buy cheap stuff they don’t need because they can afford to buy it. This stuff is mostly useless and lies around the house without being used and eats up the disposable income of the ‘Poor’
  • The ‘middle class’ buy ‘Liabilities‘ that take money out of their pocket on a regular basis e.g. a car that costs them money every month for installments, fuel and maintenance, house on mortgage, the huge flat screen TV, etc… We know these things because we all buy them and Robert Kiyosaki all these ‘Doodads’ in his book ‘Rich Dad Poor Dad’.
  • The ‘Rich’ on the other hand buy ‘Assets‘ that put money into their pockets and use the money they earn from these assets to buy their ‘Doodads’ which keeps them rich.

So Method 1 of ‘Prioritising’ your expenses is basically nothing but –

“Every time you tug at your wallet to spend your hard-earned money, try to understand whether the thing you are spending your money on is just ‘Stuff’ or ‘a Liability’ or ‘an Asset’.

Prioritising your expenses – Method 2

Rank your goals based on their urgency for achievement and their importance. Then re-check them against your own gut feeling based on your personal situation and cash flow situation.

Example (assuming your financial advisor has helped you calculate these numbers)

  1. You have a monthly disposable cashflow of  Aed 15,000.
  2. Your children are 3 and 5 years old respectively, which means you have 15 years to accumulate their higher education fees. Your monthly saving goal for education is Aed 1,500.
  3. You are 37 and need Aed 25,000 as a monthly retirement income at 65. You have 29 years remaining to save for your retirement income. Your monthly retirement savings goal is Aed 20,000.

It is obvious that you cannot save for both goals completely starting today so you may prioritize your children’s higher education by putting aside the 100% of the goal for their need first and then allocate the remaining money to your own retirement fund.

Once their education is complete, you can divert all your disposable funds towards your retirement goals.

Have a question? please feel to comment below.

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Cost-of-delay
Financial Planning In Dubai

Cost of Delay – What will a delay today cost you tomorrow?

Cost of Delay

Most people have long-term goals: starting a business, buying a home, sending the kids to college, enjoying a comfortable retirement. But too often they delay taking the steps necessary to turn their dreams into reality.

Unfortunately, by the time they realise the urgent need to save and invest money, it’s often too late to fully realise those goals. They offer many excuses for not setting financial goals, such as: “I don’t understand investing” or “I can’t afford to invest.”

The truth of the matter is, you can’t afford to delay.

 

Avoid the ‘cost of delay’

Early planning can help you maximise the power of time and reach your financial goals. It’s simple: The sooner you begin to save for your future financial needs, the more wealth you can accumulate.

Although the idea is straightforward and logical, most people fail to recognise the enormous increase in value that can result from beginning to save early. But if you wait, the amount of money you have in retirement may be drastically reduced.

Looking at the example below: a 30 year old starts regularly investing $1,000 a month, at a growth rate of 9%, By age 60, the investor will have $1,873,933.

If the investor delays:

  • One year – the investor will only have $1,707,711 at age 60.
    This means a one-year delay will be an opportunity cost of $166,222 in retirement.
  • Ten years – the investor will only have $711,167 at age 60.
    This means a ten-year delay will be an opportunity cost of $1,162,766 in retirement.
  • Fifteen years – the investor will only have $413,479 at age 60.
    This means a fifteen-year delay will be an opportunity cost of $1,460,454 in retirement.
  • Twenty years – the investor will only have $220,002 at age 60.
    This means a twenty-year delay will be an opportunity cost of $1,653,931 in retirement.
  • Twenty five years – the investor will only have $94,225 at age 60.
    This means a twenty five-year delay will be an opportunity cost of $1,779,678 in retirement.
Cost-of-delay
Cost-of-delay

 

The sooner you start saving, the better

The longer you delay before starting an investment plan, the more you will have to pay to build up a reasonable fund. This means that the longer you wait , the greater the contributions needed to reach your retirement goals due to the power of compound interest.

The charts demonstrate this point – the sooner you start saving, the better. Otherwise, you may be putting your children’s education, your business and your retirement at risk.

Cost of Delay
Cost of Delay

What shall I do?

Start now, no mater how small the amount you have. The longer your investment has to grow, the better the results. Even if you can’t afford to invest a large amount, you may be able to start a small but regular investing programme.

I hope this article on ‘Cost of Delay‘ was useful, please feel free to leave your comments and suggestions below or avail of your free financial review by filling your contact details in the form below –

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What is Life Insurance
Financial Planning In Dubai, Plan B

What is Life Insurance

What is Life Insurance?

What is Life Insurance

Buying life insurance may be one of the most important decisions you’ll ever make. In the event of a tragedy, the assured payout can help pay the bills, continue a family business, finance future needs like your children’s education, protect your spouse’s retirement plans, and much more.

What is life insurance anyway?

‘Life Insurance is like a parachute. You buy it when you don’t need it, because when you need it, you can’t get it !!!’

What is Life Insurance Term Life Insurance Plan

There are a few variations of life insurance policy. In this article, we will try to further understand the different types of Life insurance policies available:

  • Term Life insurance-The most popular type of life insurance policy is called Term Life Insurance. The term life insurance provides coverage for a specific and stated period of time. This type of life insurance is a very popular choice for a policy because it can be purchased for an inexpensive premium. The way this insurance works is that you are covered by the policy for the time period specified.
  • Whole life insurance polices, on the other hand,  are attached to a cash value system where part of the regular contributions are invested in funds of your choice and grow with time. If the cash value is high enough to sustain the policy, it can be used to pay the premiums.

If you want to get a professional and un-biased opinion for free, enter your details in the form below and I will discuss it over coffee with you.

Ask Amit

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