Why UAE residents don't have enough savings despite paying little to no taxes

Residents of UAE benefit from very low to no taxes however, most of them are still unable to save.

This is due to a rise in non-essential spending, increasing debt burdens to live up to their ‘Dubai standards’ when they can’t really afford it.

Personal finance experts blame overspending by the millennials, lack of financial literacy among average households, missing or low returns and rewards on savings products, and easy access to no-cost credit or buy now pay later (BNPL) products as well for low saving rates in the country.

“Money management is complicated, and savings ask for a lot of discipline. Most banking products do not engage with their young households in a way that could excite them. Savings need to be more rewarding than accumulating debt,” says Purvi Munot, Founder and CEO Sav Money.

Munot says conspicuous wealth in the UAE is contagious.

“When people see others living the high life, they try to buy it for themselves, even when they can’t afford it. Middle-class households have increasingly shifted their spending from ‘essentials’ — fuel, utilities, rent and groceries — to ‘aspirational indulgences’ like clothing, jewellery, collectables, manicures, sports cars and more,” says Sav Money founder.

Importantly, the UAE is one of the few countries in the world that do not levy income tax on its residents and at the same time offers one of the best lifestyles in the world. With more than 200 nationalities making the UAE their home, it attracts people professionals, investors, high net worth individuals, students and freelancers from all around the globe who call the Emirates their home.

Damodhar Mata, a financial advisor in Dubai, said given the young and internet-savvy demographics of the UAE, consumer spending has been consistently on the rise over the last few years.

“Thanks to the discount galore and lack of a working budget, some consumers tend to overspend on unnecessary items. With the emergence of the BNPL trend and easy access to credit cards, overspending is on the rise,” said Mata.

Rupert J Connor, a partner at Abacus Financial Consultants, says brunches, drinking, taxis, home deliveries and apps – so many people in the UAE fall into this category of living it up to “Dubai standards” when they cannot really afford it.

“Have you ever noticed how many luxury holidays people seem to take compared to counterparts living in their home country? A cap really needs to be placed on excessive spending in this way or else it will literally eat away at everything that is being earned. The key to stopping spending too much money in these ways is to create better money habits in your daily life. So, try to replace these activities and habits with a more virtuous way of living,” he said.

How to increase savings?

Connor suggested that creating spending rules is perhaps a more effective way to go rather than coming up with a plan that puts a restriction on how much you can spend. “A budget can be a numerical rule that’s hard to follow because it encompasses all of our different expenses. Action-based rules tend to be easier to maintain over the long term. An example of this rule is only paying with cash when you go out to eat with friends — this way, you can’t overspend because you literally don’t have the money,” he added.

Damodhar Mata advised that instead of saving what is left at the end of every month, it would be wise to decide how much you want to save every month and transfer that money into a savings account or a systematic investment plan.

“You can follow this approach to save and invest for your short, medium, and long-term financial goals and wealth accumulation.

Purvi Munot advised that understanding one’s finances is the stepping stone for managing money better.

“One should start taking note of their monthly incomes and outlays, rationalise their non-essential spending and set money aside for things that matter to them. The best way is to set (document) financial goals for yourself, save up towards them, and buy only when you’re ready, without debt, interest, or any late fees,” said Munot, who has launched the Beta version of Sav that helps users understand, save and organise their money.

-waheedabbas@khaleejtimes.com

• UAE