Over the next few months I plan to cover a number of aspects of financial planning, to build what will hopefully be a useful financial fitness plan. In much the same way as when you go to the gym or ride your bike and start a physical fitness plan, you will not see results immediately, but over the course of weeks and months, by sticking to your goals and plan the benefits will start to show, and build as time progresses. And your financial health is very similar – a lot of people become disillusioned when they do not see immediate results, or suffer a setback, but the key is to stick with the plan and carry on building for the future.

To start with I will cover managing your money and some of the key things to be aware of and the best way to manage your finances.

Unless you are very fortunate, most people will have to use debt during their lives, and debt itself is not a bad thing, as long as it is used and managed correctly. It can easily get out of hand if it is not carefully monitored. For large purchases such as property a loan is often used, and referred to as a mortgage. The interest rate is generally relatively low for this form of borrowing, as the term is generally long and the debt is secured by an asset, so the lender is confident it will make money over the long term and it has control over the property if you should stop paying back the money.

Where many people can quickly get themselves in difficulty is with unsecured debt, such as credit cards and personal loans. These forms of debt have a higher interest rate applied to it because the lender has nothing to hold as collateral, and the loan is often over a shorter period of time. Using a credit card as an example, you can spend each month, and pay a portion off, but the interest will be charged on the whole amount, and interest rate charged by credit cards can be up to 40% per annum, but is likely to be shown as 2% per month, so you may not realise the true cost of the borrowing, and then over time the debt builds up to a point that it is difficult to repay.

It can be helpful to look at a couple of terms that you often see quoted after interest rate numbers. The first is the flat interest rate – this is an interest rate calculated on the basis of the stated initial principal amount of the loan irrespective of the term of the loan. The second term is the Annual Percentage Rate or APR which is the annual rate that is charged for borrowing, and expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction. The APR is generally a higher number and is a much more accurate measure of the cost of any loan.

This is a brief summary of the debt situation, and next time I plan to look at wills and other protection solutions. If you have any queries please do not hesitate to contact me at jthomas@acuma.ae or on 0508543983.

James