Step 8 – Invest: Pay Yourself First
Since I started the Dubai Money Guy page, the question I have received most from readers is ‘how do I start to invest?’. Well, the answer is… if you have a current account that pays interest or a savings account, you already have. That’s right, just putting your money into a current account is an investment of sorts. That’s because the bank uses your money to lend to other customers and other banks. In return they pay you a miserly level of interest on your money. The low level of interest reflects the very low risk of the bank going bust and you losing all your money. If you want to receive higher levels of return on your money you will have to take on higher levels of risk, or be willing to tie up your money for longer. The below is an oversimplification but in general:
Low Interest = Low Risk
Higher Interest = Higher Risk
Where you decide to invest therefore, really depends on your own personal appetite for risk and your expectation of returns (profit). It’s no good piling all your money into growth stocks if you would be scared and stressed out by temporary drops in the value of your investment. Likewise there is no point keeping all your money in a savings account if you are looking for double figure returns on your investment.
The best way to start an investment pot is to ‘pay yourself first’. That means that when you receive your salary, you make your investment payment first. If you are starting from zero, perhaps the first step could be to set up a savings account linked to your current account and have a standing order to move your investment amount every month as soon as your salary arrives. Set a sensible amount initially, that you know that you can stick to every month. Increase it later if you are finding you have money left over at the end of the month. Every time you receive a salary or income boost, increase your investment amount accordingly. I have an e-saver account linked to my current account that pays 0.6% interest on balances up to DHS 100k. If I was just starting out, I would use that account to build enough savings to open my first investment. It’s also a sensible place to keep that emergency fund that we created, just make sure that you treat your rainy day fund and your new investment pot as separate.
If all of this is new to you… it might be worth talking to a financial advisor to get an idea of your options. Just be careful to pick an INDEPENDENT financial advisor. That means that they don’t get paid to draw you into expensive investments. Unfortunately, that normally means you have to pay for their advice. However, often you can get a one-off free advisory session with no commitment. I had one of these with a company called AES in Dubai. They reviewed my (horrible) investment accounts, and gave me a good overview of how much these were costing me. I ultimately decided to invest independently but I found them to be very professional, and their investment options had an easy to understand cost structure. You can find them here:
If (like me) you do decide to build your own portfolio of investment, the traditional wisdom is that you create a balance between stable, income producing investments and more volatile, growth investments. The balance between the two is dictated by your age / proximity to retirement. An easy way to find that balance is that your age in years should be the percentage of your portfolio that you keep in bonds and cash / cash convertibles. The rest is invested in equities (stocks and shares).
Bonds = Money that you LEND a company or organisation that they REPAY you with interest over a period of time, or on a set date.
Stocks & Shares = A part of a company that you actually OWN. The price of the company will go up and down on the market, and you may be paid a share of the company’s profits, called a DIVIDEND.
The easiest and cheapest way to build an equity portfolio is through ETFs and Index Tracker Funds that automatically mirror a whole index like the FTSE 100. Because they are automated they are cheaper to run and that saving should be passed on to you with charges of only a fraction of 1%. To do this you will need to set up an online trading account with a brokerage like Saxo Bank. These online platforms allow you to trade in a wide array of financial products all in one place. I currently hold a mixture of individual equities and market tracking ETF’s. I’ll break down my full portfolio in a future post.
Ultimately, you should invest in the things that you feel most secure and confident with. If that means property to you… don’t listen to anyone who tells you that you HAVE to own shares or bonds. It’s all about understanding your own risk tolerance and managing that over time. As you start to build your investment pot you can begin to diversify your investments safe in the knowledge that you have a strong foundation that you are confident with. For example, I’ve actually treated my rental property investments as my bond holding… because they deliver a fairly steady rate of 5% – 6% and I didn’t need fast access to the capital investment. True to the formula, I currently hold about 40% of my net worth in these properties, and the rest in a mixture of equities and peer-to-peer investments.
Investing may feel intimidating at first… but once you have started and begin to see your money grow… you’ll be surprised how addictive and rewarding it can be.
(UPDATE) – I just found this really good post at Dead Simple Savings that covers a lot of the same ground but probably better… check it out.
Next Post: Steps 9 & 10