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Financial Fitness Plan – Education Planning
Last time I gave an overview to the subject of savings and investments. This is a large and potentially complicated area of financial planning, and this month I will focus on planning for your children’s education. While in some countries this cost is met by the state, increasingly parents are having to fund their children’s education, or at the very least contribute to the cost.
Certainly here in the UAE the vast majority of expatriates will have to pay for their children’s school fees, and indeed it is likely that they will also have to fund any university fees as well. The school fees vary greatly dependent upon the institution, and the choice of school will obviously have an impact on the amount that will be required to pay for the education that your child receives.
While the fees that are levied are closely monitored in the UAE by the Knowledge and Human Development Authority (KHDA), the fees have and are likely to increase in excess of the rate of inflation, and so the real of cost of education is only going to increase. In addition, secondary and university fees will be more expensive that primary education.
Therefore it is vital that school fees are taken into account as part of your overall financial plan so that you are not faced with some potentially difficult financial decisions in the future. When considering your options, and formulating a plan, I would recommend that you consider what parts of your child’s education you wish to plan for. School generally starts around age 4 or 5, so this does not leave much time to start planning unless you are very organised! Also as this education is generally the least expensive, often this can be funded from general income.
If wish to prepare for secondary education, then you will have at least ten years to put a plan in place, and obviously for university, you will have up to eighteen years to prepare. These timescales should allow you build a significant amount of money that can cover most if not all of your child’s education costs.
As with most aspects of financial planning, the sooner you start planning, the easier it is likely to be to build the amount of money that you need. It can be quite difficult to work out how much you are likely to need, and for what course you may end up funding, but most colleges and universities publish their current fees and so with some inflation assumptions, you can start to work out how much you will need.
Once this is established, we can assist with calculating how much you will need to contribute on a regular basis to build the required fund. How much this grows by obviously depends on a number of factors, such as your attitude to risk, and what investments are selected, which is no different from other forms of financial planning, but once you know what you are aiming for it helps to focus the plan. Even if the exact amount is not met, there should still be a significant sum accumulated that will help towards the fees that will need to be paid.
With the right plan in place, and as many unknown factors removed from the equation, your children’s education solution can be tailored to your needs, and the earlier it is started the more time and therefore the more change you will have of meeting yours and indeed your children’s goals.
As with all financial plans, this should be reviewed on a regular basis and revised as and when necessary. Next time I will look at retirement planning. If you have any queries please do not hesitate to contact me at jthomas@acuma.ae or on 0508543983.
Financial Fitness Plan – Savings and investments
Last time we looked at why you should have an emergency fund and cash reserves, and how best to manage these. In the next part of the Acuma financial fitness plan, I will focus on savings and investments.
This is a huge area of planning, and arguably the one that most people spend the most amount of time planning for – sometimes to the detriment of other areas of financial planning. When we refer to savings and investments what do we mean? Generally this is referring to longer term savings, which may be for a particular goal or aim, such as retirement, children’s education, or property purchase. How long the term is will obviously depend on your age, and what goal you are looking to save for, but as a guide it is generally for 5 years or more so that the investment has a chance to grow, and shorter term market movements start to be filtered out by longer term market trends.
The key difference is that rather than simply saving into a bank account, the savings are placed into other asset classes. There are a huge number of assets that can be invested into, with the most popular being equities, bonds, property and precious metals. All of these assets have their pro’s and con’s and often personal preference will decide which to invest into.
I generally advocate a well-balanced, diversified portfolio that takes into account all of these and indeed many other asset classes. In the 15 years that I have been involved in this industry it has been almost impossible to predict which asset class is going to perform best, and so having a small amount in many is the best way to smooth out the peaks and troughs that can come with investing.
Establishing what is the right investment for you is vital to ensure that your money is invested in the right place, and that you are comfortable with where it is invested. To do this we need to work out what your attitude to risk is. There is no right or wrong answer and it will vary between all investors. Attitude to risk simply means how much volatility you are willing to accept with your money in return for the potential for higher returns.
Another way to look at it is predictability. If you leave your money in the bank the returns are very predictable – an amount of interest will be added each year, but it is often quite a small amount. So to try and improve that number you may have a less predictable return, but hopefully one that is higher – and generally the longer you are able to invest for, the better the returns will be.
There are two main ways to invest – on a monthly basis and by way of a lump sum. It is often the case that you may have a different view on regular saving to lump sum investment – investors can be keener to take more risk with a regular contribution but with a lump sum are more concerned with maintaining the initial investment, so wish to be more cautious.
This is obviously a brief guide to savings and investments, but I hope that this has given an insight into what to consider, and the right solution will depend on your personal circumstances. Next time I will look at in more detail at saving for education. If you have any queries please do not hesitate to contact me at jthomas@acuma.ae or on 0508543983.
Financial Fitness Plan – Emergency Funds & Cash Reserves
Moving further through the Acuma financial fitness plan, this time I will focus on emergency funds and cash reserves. By way of brief recap, we have now considered how to manage debt and why a will and putting protection in place is crucial for your financial well-being.
Emergency funds – what do I mean by this? This is simply having a buffer of available cash so that in the event of being hit by an unexpected bill or cost, you have the cash available to pay for it. I am not referring to normal monthly expenses but something that is out of the ordinary, such as having to book a flight home, or an issue with your car, or maybe an issue at home. All things that you hadn’t normally budgeted for, and could upset your cash flow if you are not careful.
By having an emergency fund that is readily available, this means that you can cope with these unexpected surprises and deal with them without having to resort to borrowing money and potentially amplifying the issue with additional interest.
When I say readily available, by this I mean that the money is in a bank account that is immediately accessible, and can be accessed easily. Now this means that you need to show some level of restraint, as it can be easy to dip into this money for other purposes and find yourself short of funds at the worst possible moment.
How much should this amount be? I recommend between three to six months’ salary, so that it is enough to cover most eventualities, but not be so much that you feel like it is simply money sitting around. Indeed a question that is often asked is where should I put this money? Should I invest it? But the purpose of the emergency fund is to be immediately available and not be invested into anything that can fluctuate in value, as it generally the case that when you need the money most is the most inappropriate time to sell an asset.
Following on from the emergency fund is the cash reserve. These can be one and the same, but while it is best to have the emergency fund in a no notice type bank account where there is little or no interest paid, money above and beyond this can be placed into accounts that offer better interest rates. Generally in return for these increased returns there is often a notice period applied to these accounts, or they be for a fixed period of time, and if you need to break the term you will be penalised. This shouldn’t be an issue, as these funds should need to be called upon urgently, and so can be managed in a more structured way.
There is no guideline as to how much cash you should have in reserve, as it will be depend on an individual’s personal circumstances, what their longer term plans are, and indeed their attitude to risk. If the money is not needed for any particular purchase then other longer term strategies could be considered as a source for improved returns.
As with all investments, as the amounts involved grow, it is wise to consider diversifying where the money is held, and especially for expatriates, consider an offshore account, so that large amounts do not get caught up with any Sharia’h law issues should anything happen to the account holders.
As with most aspects of financial planning, the right emergency fund and cash reserve will depend on your personal circumstances. Next time I will look at savings and investments. If you have any queries please do not hesitate to contact me at jthomas@acuma.ae or on 0508543983.
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Financial Fitness Plan – Wills & Medical Insurance
In the next part of the financial fitness plan, I will cover wills and medical insurance. Last time I covered how to manage debt, and hopefully you will have put some of the basic tools into place to manage your income each month. Following on from managing your money, wills and medical are essential items to have in the Middle East.
Starting with wills, let’s start with the basics. What is a will? Simply put, a will is a document that is legally recognised as your written instructions as to what you wish to happen with your estate in the event of your death. Sounds simple doesn’t it? And in most cases it is. The difficulty arises when there is not a will. When this occurs, there are no instructions as to what you wanted to happen to your estate, and so most governments have set out rules that are to be followed.
And this is where the problems can occur, as these rules may not be what you want to do with your estate, but as you are not able to argue the case, they will be followed. And more importantly than assets, if you have children who do you want to look after them? Again unless you have documented this, how can your wishes be followed?
I appreciate that this can be a difficult subject to discuss, and none of us want to think about our own mortality, but if we don’t the alternative is potentially much worse, with no instructions in place, and a far more slow and difficult process that our loved ones will have to endure. In summary, a will is an invaluable document that we all should have in place and then should be reviewed regularly.
Interestingly, the majority of queries that I receive relate to what I would call relatively minor issues – that is to say claims relating to smaller claims for some medications or treatments. While I appreciate that these can be serious issues, and it is annoying if not all of a claim is covered, equally the cost is generally relatively low in comparison to inpatient treatment, and it can have a huge impact on the cost of your cover. An analogy that is often used is in relation to car insurance – if you knew that you were going to have an accident would the insurer cover you? Probably not, or they would charge a huge premium, and the same is true of medical insurance.
As with most aspects of financial planning, the right plan will depend on your personal circumstances. I hope this has given you a brief summary of why you should have a will, and also why medical insurance is so important. Next time I will look at life insurance, and why it is essential part of your financial fitness plan. If you have any queries please do not hesitate to contact me at jthomas@acuma.ae or on 0508543983.
Financial Fitness Plan – Life Insurance
They say there are two certainties in life; Death and taxes, although the latter seems to be holding in abeyance in this market for the time being. So here in the Emirates we are lucky enough to only have to deal with one certainty, that being the former; death. The fact that we will all die one day is no surprise. We have no real control over when we die but we can take charge of some of the circumstances in which we leave our dependents should we die too soon.
There is no denying that this is a bit of a grim subject, but the consequences of not planning could be even worse. And as part of your financial fitness, this is arguably the most important part of the exercise.
By way of an example let us assume a husband and wife with two children, and the issues that they may face. Why do you need life cover? There are probably a whole host of reasons, but the main one will be to replace you financially in the event of your death. That may sound harsh, but that is what life cover is for. It is to replace your income that you would have earned if you were alive to support your family.
Therefore to begin to calculate the actual amount of cover that you require by establishing your income now and how much of that your family would need to continue to enjoy the lifestyle that they currently have. Once you have this figure for one year, it needs to be multiplied by the amount of years the cover is required. This may be until you retire or until your children are financially independent. Again this will depend on your individual circumstances.
With this figure now established, you can deduct assets that you may have already accumulated and life policies that are already in force, assuming that these are competitively priced, and cover the desired period of time to reach the final figure.
The next question is to review the type of life cover to implement. There are two main types the first is term assurance, and the second is whole of life. Term assurance will provide life cover for a fixed period of time and will no accumulate a fund value.
Whole of Life assurance as the name suggests can offer cover for the whole of your life without a fixed completion date, other than when death actually occurs. This type of cover can build up a fund value which can be returned to you as and when you decide cover is no longer required. This type of cover is generally more expensive for the same level of cover, because it has no end date, and there is the investment content as well.
Generally I would suggest that term assurance is the better option as the cost of the cover is usually significantly lower, and is designed for one purpose only – life cover.
In addition to considering life cover, I would always recommend reviewing the rest of your protection requirements such as critical illness cover and income protection. Indeed it could be argued that ‘financial death’ is more painful than actual death as you would still be alive but unable to work and look after your family.
Financial planning is an art not a science and be considered on an individual and bespoke basis to get the best value for you. If you have any questions or queries please do not hesitate to contact me for further information or advice. Next time I will look at emergency funds and cash reserves. If you have any queries please do not hesitate to contact me at jthomas@acuma.ae or on 0508543983.