We all aspire to create wealth and better manage our finances, but more often than not, it all seems too complicated to put into practice. The complexity, however, arises from not knowing enough about how money works. Financial literacy is a significant problem in the UAE and the world in general. According to a recent study, only 38% of adults in the UAE are financially literate(1). While these digits may come as a shock to many, especially considering the UAE’s robust position in the global economy, the gap in financial literacy can be attributed to the fact that the country is relatively new. The urgent need to address financial literacy is even more pertinent for us millennials, who make up nearly 36 per cent of the UAE’s population. In all of human history, millennials have emerged as inheritors of one of the largest inter-generational wealth transfers amounting to $17 trillion or 10% of the world’s private wealth(2). Just imagine, if all of this wealth could be put to work.
So, what makes a person financially illiterate? The Organisation for Economic Cooperation and Development has a working definition that sums it up quite well; ‘A combination of awareness, knowledge, skill, attitude and behaviour necessary to make sound financial decisions and ultimately achieve individual financial well-being’. It’s about developing functional proficiency in core money skills that are essential to managing our future financial aspirations and needs. Unfortunately, while the world’s existing education system enables us to become professionals, it does not equip us with financial management skills from an early age. Hence, we are left to figuring things out on our own. However, here are a few things that we can do to make ourselves more financially secure and empowered.
Set your goals
To get somewhere, it is essential to know where you’re going, and setting your financial goals is the first big step. Determine your saving potential by analysing your income and monthly expenses. Now think of what you want to achieve in the short-term and long-term. Short term goals, such as a new car, a long-awaited vacation or higher education could be the milestones on the way to your long-term goals such as buying a property or retiring early. Each one of us has our very own aspirations. The key to setting financial goals is aligning our aspirations with our finances. Once you have your goals in place, it is time to make a budget and stick to it.
Think about passive income
Warren Buffett once said, “If you don’t find a way to make money while you sleep, you will work until you die”, and I couldn’t agree more. Making passive income, which means making your money work for you, is one of the most critical aspects of financial literacy. You need to invest your money in the right place for it to be able to give you favourable returns. Before you invest, you must realise your appetite for risk. In most cases, high-risk investments have the potential for higher returns, while lower risk instruments offer lower but guaranteed returns. You can consult a reputed financial planner to get your investment portfolio started. Start small and build a diversified portfolio gradually over time.
Consider Real Estate
Real estate can prove to be one of the most prudent investments. While it undoubtedly has its ups and downs, in the long run, it almost always pays off. There are two ways in which you can look at real estate as an investment – buying a home or buying an investment asset. When you own your house, you never have to pay rent again. When you buy it as an asset, it serves as a great source of passive income. The great thing about investing in real estate is that banks will lend you money to purchase a property. Additionally, rental returns can give you double-digit ROI over time, far better than most asset classes. However, when it comes to investing in real estate, you must only consider credible and well-known developers who can guide you through the entire process.
I understand that all of this is easier said than done. Managing your finances requires determination and discipline. It is unfortunate how little we are taught about money and how it works, considering so much of our world revolves around it. Schools should start teaching their students about financial topics at an early age, and banks and other financial institutions should also do a better job of making people aware of their products and services. The idea of retiring at forty is quite common among millennials and Gen Z; and to realise this dream, one needs to make informed financial decisions early on in life. So, what if we weren’t taught these essential skills? We’ve got all the tools at our disposal to develop ourselves and achieve all that we aim for.