Whether you have been working on your finances for many years or you are just getting started, it can be a little challenging to decide whether you should be saving or investing.
Saving is undoubtedly the safer choice because the amount in your bank account would not typically decrease unless you withdraw the funds, but the interest rates on savings accounts may not allow your money to grow quickly. At the same time, it is quite tempting to invest to receive higher returns and beat the inflation. But the value of your investments may not always go up. So, how do you know whether you should have an investment plan or a savings plan to earn bigger returns. Here’s what you need to know.
Difference Between Saving & Investing
Saving: Saving is all about putting money aside, bit by bit. You usually save up to pay for something specific, like a deposit on a home, to buy a car, to cover any emergencies or for a holiday. A savings plan helps you put your money into cash products like savings accounts in a bank.
Investing: Investing is all about taking some portion of your money and trying to make it grow by buying assets that you think will increase in value. For instance, you can invest in property, stocks, or shares in a fund.
How to Have a Strong Savings Plan in UAE?
When it comes to saving, there are plenty of benefits. Firstly, the amount you save in a savings account will not decrease over time, as long as you do not make withdrawals. A saving plan also allows you to reach your goal on time as long as you save the proper amount each month. The best way to have a strong saving plan is to take the total you need to save and divide it by the number of months, until you need to reach your goal. However, due to inflation, the money you save will decrease in value each year.
There are many saving tools, which can help you to save a good amount of money.
- Savings Accounts: A savings plan can allow you to set money aside and earn interest in the process. Some savings accounts pay a lower interest rate. But some offer higher interest rates that can actually help you grow your money.
- Money Market Accounts: A money market account is like a savings account that earns interest. It may also allow you to write checks, but money market accounts sometimes have higher minimum balance requirements. These accounts usually offer higher interest rates than savings accounts.
- Saving Bonds: Saving bonds are issued by the government, wherein you can buy a savings bond and earn interest over time. But, interest rates on saving bonds are not always high. These typically work out best if you hold them to full maturity, which may take more than 20 years. If you redeem them early, you need to pay an interest penalty.
- Certificates of Deposit: Certificates of deposit (CDs) are a great way to earn a higher interest rate on your money, wherein you promise a bank that you will not withdraw the amount for the particular term of the CD, in exchange for earning a higher interest rate on your money. But you can withdraw the money early depending on the terms of your CD, by paying an interest penalty.
How to Have a Strong Investment Plan in UAE?
An investment plan can be very beneficial. It provides your money the potential to grow faster than it could in a savings account. If you have a longer time until you need to meet your goal, your returns will compound, which means along with a higher rate of return on investments, your investment earnings will also earn money over time.
So, whether you are an expat or an Emirati, the journey to financial independence inevitably starts by learning how to have a systematic investment plan in the UAE. This is a simple, effective, and low-risk way to grow your money, over a long term. Here are a few investment opportunities, where you can invest your money.
- Stocks: Investing in a company’s stock is a great investment plan. It is like owning a portion of the company. There are two ways to make money from stock ownership, dividends and appreciation in the stock price. Many companies share a portion of their net income with shareholders, which is called a dividend. In this, the company pays a dividend based on the number of shares you hold. Most of the companies pay dividends every 3 months. Appreciation in the stock price is like long term investing. If you bought a share in a company for AED60 in 2020 and it is now worth AED150, then you have earned AED90.
- Bonds: A bond is like a debt instrument that corporate companies and governments use to raise money. There are typically 3 types of bonds:
- Corporate bonds: Company issuances
- Treasury bonds: Federal government issuances
- Municipal bonds: Local government, city, and local community issuances
Bonds provide a consistent stream of income for a certain amount of years, like 10-year and 20-year bonds. You can also sell them at a higher price before maturity and make some money. Bonds are less risky as compared to other investments and are typically used as a counterbalance to stock investments. But before you invest, you should conduct diligent research to understand if the company has a low-risk profile, as defined by bond rating agencies.
- Mutual funds: If you do not have enough time to evaluate the stock market, you can buy stocks and bonds through mutual funds, which works as a great investment plan. A mutual fund pools money from individual investors and invests them in stocks, bonds, and other fixed-income securities under a fund manager’s supervision. There are different types of mutual funds:
- Open-ended mutual funds: These you can buy or sell throughout the year. You may add more units or sell the ones you have.
- Close-ended mutual funds: You can only sell these mutual funds at a specific maturity date and you have to hold it until maturity.
- ETFs: ETFs are best options as sip investments for passive investors who wish to achieve diversification. So, by owning a share of one ETF, you gain the ability to own numerous stocks or bonds within that basket. While a single ETF offers a lot of diversification, purchasing many ETFs amplifies it. Apart from the diversification that each ETF offers, you can enjoy more diversification and less portfolio risk by combining various ETFs that are spread out across broadly different markets.
- REITs: If you want to enjoy some benefits of the UAE real estate market without the downside of purchasing properties, REITs (Real Estate Investment Trusts) can be your best bet. These are stocks of companies that purchase real estate properties (Equity REITs) or provide mortgage facilities to real estate investors. Instead of buying properties and managing them, you can hold the shares of companies who are investing in the market, including mortgage lenders.
The desire for financial independence and prosperity leads many to ask how to save or invest money in the UAE. So, have you started your investment journey yet or you are still planning to stick to your savings plan?
Asfar is an Independent Financial Advisor and Associate Partner with Continental Group based in Dubai, UAE with over 12 years of experience in the region. His clientele includes high networth individuals, corporations, C suite executives, business owners, and entrepreneurs in the region.
Although with proper planning and consistent effort, you can save, invest and distribute your own finances. It is always good to get some professional advice. If you need help in planning your finances in the short, medium, or long term, I can help you do so. You can write to me with your questions and comments to firstname.lastname@example.org