Mind Your Money : Is saving enough?

True wealth creation requires a strategic approach – a well-crafted financial plan

By Sandeep S. Jadwani

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As a financial planner with years of experience guiding clients towards their financial goals, I’m often asked, “Isn’t saving enough?” The answer, unfortunately, is no. With inflation touching all time highs and expected to remain higher for long time to come, a pure saving will in fact erode the value of your money and leave you in a very critical financial situation. While saving is a crucial first step, true wealth creation requires a strategic approach – a well-crafted financial plan.

Let’s explore this concept through the contrasting stories of two individuals: Mr Saver and Mr Savvy. Both, for 20 years, diligently set aside Dh500 every month, a total contribution of Dh120,000 each. However, their financial outcomes differ dramatically.

The tale of two friends: A race to retirement

Imagine the glittering skyscrapers of Dubai piercing a twilight sky. Here, amidst the city’s relentless hum, two friends, Mr Saver and Mr Savvy, embarked on a financial odyssey. Their destination? A comfortable retirement. Yet, their paths diverged, revealing a powerful lesson about planning and perseverance.

Mr Saver: The steady saver

Mr Saver, a man of prudence, started strong. At 25, he began socking away Dh500 monthly into a recurring deposit, a testament to his discipline. He believed in the power of steady saving, like a seed patiently waiting to sprout.

Mr Savvy: The strategic investor

Mr Savvy, ever the strategist, took a different approach. He, too, started investing Dh500 monthly at 25, but with a twist. He opted for globally diversified Systematic Investment Plans (SIPs), a method of investing a fixed amount at regular intervals (monthly, quarterly) into mutual funds. These funds pool money from various investors and invest it in a basket of stocks or bonds, offering diversification and potentially higher returns than traditional savings accounts. This approach is often referred to as dollar-cost averaging. Here’s the beauty: by consistently investing a fixed sum, you buy more units when the market dips and fewer units when it soars. It’s a strategic way to manage your investment regardless of market fluctuations, averaging out the cost per unit over time But Mr Savvy didn’t stop there. He understood the insidious nature of inflation, so he implemented a clever tactic – increasing his SIP contributions by 10 per cent each year, a concept known as SIP top-up. This strategy, like a snowball rolling down a snowy hill, accumulates momentum with every passing year, allowing you to invest more as your income grows.

Sandeep S. Jadwani, Head of Investment Advisory, Habib Investment Limited

The power of compounding: A tale of two corpus

Fast forward 20 years. Mr Saver, through sheer consistency, had accumulated a respectable Dh180,353.78. However, Mr Savvy’s strategic approach, fueled by compounding (earning interest on your interest) and increasing contributions, yielded a staggering Dh663,750! The power of strategic investing was undeniable.

Retirement: Reaping what they sowed

As retirement approached, both gentlemen turned to a common strategy – the four per cent rule. This allowed them to withdraw a sustainable four per cent of their corpus annually, ensuring their nest egg lasted a lifetime. Another option Mr Savvy could have considered is a Systematic Withdrawal Plan (SWP). This allows you to withdraw a fixed amount from your mutual fund holdings at regular intervals, providing a steady stream of income during retirement. While both enjoyed a comfortable retirement, the disparity was stark. Mr Saver’s annual withdrawal amounted to Dh7,214.15, while Mr Savvy’s savvy planning secured him a significantly higher Dh26,550 annually. Here, the impact of the compound annual growth rate (CAGR) becomes evident. CAGR represents the average annual return on an investment over a specific period, and Mr Savvy’s higher average returns due to his diversified portfolio significantly impacted his total corpus.

The takeaway: Chart your course to financial freedom

The tales of Mr Saver and Mr Savvy showcase the transformative power of planning and calculated risks. While Mr Saver’s consistency deserves credit, Mr Savvy’s strategic approach unlocked a world of possibilities. The story of Mr Safe and Mr Savvy highlights the stark difference between saving and investing. Saving is like putting money under the mattress; it’s safe but grows slowly. Investing, on the other hand, is like planting a seed. It might seem small at first, but with care, time, and the right guidance from a trusted financial advisor like Sandeep Jadwani, it can blossom into a magnificent tree, providing shade and financial security for years to come.

Are you ready to chart your own course towards financial freedom? Take the first step today and explore your investment options and share your money concerns with me via my social handles, so together we can “Mind Your Money”. Remember, a well-planned financial journey starts with a single step. Don’t wait! Instead of diversifying across different asset classes, consider diversifying your income streams. This could mean creating a side hustle, investing in rental properties, or developing skills that allow you to consult or freelance. Multiple income streams provide a safety net and open doors to unexpected opportunities.

Sandeep S. Jadwani - ACSI, CIB (Head of Investment Advisory, Habib Investment Limited – Regulated by DFSA) is qualified, experienced and an award-winning financial adviser to High Net-worth Individuals. Been in the UAE for over 15 years and guiding individuals to efficiently and effectively manage their finances to achieve their financial goals. Connect with him on Instagram @sandeep_investmentadvisor and Linkedin : https://www.linkedin.com/in/sandeepjadwanibestadvisoruae