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For most people saving money is not easy. Clearly, it is much more natural to spend money than save it. Since saving is not natural, it is something we must learn to do and work at. Saving money over a lifetime requires conscious effort and continued awareness so that it becomes a habit.
The starting point for any savings goal is to understand your spending patterns. Just knowing how much you spend and where you spend your money sets the foundation for a sound financial plan.
In exchange for opening an account and giving the bank your money, the bank agrees to increase your money by offering interest every year. For instance, if you were to take AED 100 and put it in an account that offers 6% interest, by the end of the year the bank will have given you AED 6. So, without doing anything, your savings has grown to AED106. At first, interest might not seem like a lot of money. But it grows over time. And it can add up very quickly – thanks to a powerful moneymaking tool known as compound interest.
Compounding has often been referred to as the eighth wonder of the world. Put simply, this is interest earned on interest. Let’s look again at that AED100 in an account earning 6% interest. The AED106 you have after the first year would earn 6% again the next year – AED6.36. After you add that to the total, you would have AED112.36. And that new total will then earn 6% the following year – AED6.74, another increase. As long as you leave the money in there, it will keep earning more. If you left that same AED100 in a 6% interest account for 40 years, you’d have AED1,028, and your annual interest earnings would be more than AED50 per year.
One simple way to see the power of compound interest is through the “rule of 72.” It’s a formula for figuring out how quickly your money will double if left alone in an interest bearing account. All you have to do is divide 72 by the interest rate. So if your rate is 6%, divide 72 by 6. At that rate, it will take 12 years to double your money.
Don’t let anything stop you from starting a savings plan. It’s never too late to start & the earlier you start the better are the results.
Next, is to simply get started. Start an automatic savings plan. Have money come automatically come out of your bank account or off your salary. Most people spend first and try to save what little they have left over. The best plan is to save first and then spend what you have left over.
How much should you save? Any financial planner can run some numbers and tell you how much you need to save with the right assumptions. The amount matters less than getting a savings plan started. You’ve got to start the habit. Remember something is better than nothing and more is better than less.
A firm objective or a defined goal to save towards is the beginning of the journey. There could be several goals depending on the stage of life you are in. Your financial goals could be multiple and any of the following:
Buying a dream car / Going on a vacation / Marriage / Children’s education / Buying a house / Retirement planning. All of these can be categorized as short term / medium term / long term goals. Whatever these goals are, it’s a good idea to write them down to start working on achieving them. You can then divide them into long, medium and short term goals and prioritize. Put some actual figures and dates next to your savings goals – this will help you work out what’s achievable.
To find money available for savings, first determine where you are currently spending your money. Tracking expenses will provide the answers. Write down every dirham you spend. At the end of the month, take a look at where your hard-earned cash really goes. You just might be surprised. A good place to start is your bank statements. Some of your expenses may be fixed such as mortgage repayments, but chances are you’ll find different areas where you can cut back and put more into savings.
A well-designed spending plan considers all sources of income, living expenses, debt obligations and savings. Be sure to incorporate all three expense categories: fixed expenses (e.g., mortgage, auto loans and rent), variable expenses (e.g., credit cards, groceries, entertainment, clothes and monthly bills) and periodic expenses (e.g., home renovation, and car maintenance). When constructing your budget, be realistic when looking for opportunities to save money. Know, however, that small changes over time can indeed add up. For instance, take a look at your cable package and cell phone plan to determine if you have the right fit for your lifestyle. Check your budget to see if you’ll be able to reach your goal in the timeframe set. If you haven’t drawn up a budget before, it may be a good time to get one underway to support your savings plan.
There are many ways to optimize your savings. Consider splitting money between accounts that are liquid (such as a savings account) versus those intended for more long-term savings (such as Fixed Deposits). Consider using automatic sweep deposits, transfer of money whenever possible to an account bearing interest in order to keep money out of your hands and in a safe place. Know that sometimes easy access to saved money is needed for emergencies, so don’t put all of your savings into vehicles where you’d be penalized for withdrawal. Having a specific target or goal for saving can be a good starting point for a savings plan.
A current account or checking account is opened at a bank for the purpose of providing frequent access to funds on demand. Current Accounts are meant for convenience of payments & withdrawals; hence they tend not to bear interest. Instead, you can deposit or withdraw any amount of money any number of times, subject to availability of funds. These accounts come with a cheque book & debit card.
A savings account is a deposit account held at a bank that provides principal security and a modest interest rate. Savings account funds are considered one of the most liquid investments outside of current accounts and cash. Savings accounts are generally for money that you don’t intend to use for daily expenses. These accounts come with a debit card.
A fixed deposit is a deposit account held at a bank for a fixed term and amount. These are generally short-term with maturities ranging anywhere from a month to a few years. Fixed deposits offer better interest rates in comparison to savings accounts. When a fixed deposit is opened, you understand that the money can only be withdrawn after the term has ended or by withdrawing pre maturely by paying a penalty.