What is the best way to save money this year?

When it comes to resolutions for 2023, saving more money often ranks near the top of many people’s to-do lists.

Extra savings could help you cover a costly purchase or an emergency expense in the future.

Increasing savings was the top New Year’s resolution for 44 per cent of 2,008 consumers in the US, according to an October survey by Bank of America.

Twenty-two per cent also prioritised saving for retirement as a top resolution, while 11 per cent picked saving for a child’s or their own education, the survey found.

“Even if it’s just implementing one or two resolutions, having the right financial mindset can get you off to a good financial start to 2023,” says Joseph El Am, general manager of digital wealth manager StashAway.

“You’ll gain better financial control and reduce financial stress, contributing to your overall mental and financial well-being.”

If you are looking to save more money in 2023, these steps can help you get started.

Keep a budget

The importance of creating a budget cannot be overemphasised, says Shivansh Rachit, founder and board member of asset management company Hedge & Sachs.

This creates financial stability and helps you track expenses, understand how much you should be spending, and helps you to eliminate bad spending habits.

The more you follow your budget, the more likely you are to get ahead in terms of savings, he adds.

“Splurging on items on a whim might bring you joy in the short term, but if you make it a habit, you can end up eating into your emergency fund or your long-term financial goals," Mr El Am says.

“To create a budget, first, track your expenses over the past few months. Find out how much is going towards your needs (food, rent and utility bills), wants (entertainment and recreation) and savings, investments and debt repayments.”

Use this information to understand how much you should budget each month and see where you can cut back on non-essential spending.

Alternatively, you can try using the 50/30/20 rule as a guide, Mr El Am says.

“Reserve roughly 50 per cent of your take-home pay for your day-to-day needs, 30 per cent for your wants and 20 per cent for your savings, investments and debt repayments,” he says.

“These proportions only serve as a guide, so make any adjustments that help you reach your long-term financial goals sooner.”

Have a dedicated savings account

A savings account may not be at the top of your list of priorities on your way to financial autonomy. However, it is critical to have at least one savings account — if not more, Mr Rachit recommends.

“It has a multitude of benefits: it can act as an emergency fund, and at the very baseline, provides security for your money and ease of access to your finances.”

Pay off your credit card

The average credit card interest rate in the UAE is 37.75 per cent per annum, Mr El Am points out.

If you only repay the minimum amount on your credit card at the end of each billing cycle, you’ll be working extra hard to pay off the interest fees, which can snowball quickly.

“Say you have a credit card debt of $5,000. If you only pay off $500 per month at 37.75 per cent interest per annum, it’d take you one year and one month to pay off the debt, and it’d cost you an extra $1,097.57,” he says.

Given how costly credit card debt is, it’s critical you pay it off as fast as possible, even if it means cutting back on extra spending for a few months and holding back on investing, according to Mr El Am.

“That’s because credit card debt is likely to accumulate interest at a higher rate than any other returns from your investments,” he says.

“Credit cards are only worth their cashback and reward points if you can pay them off in full every month.”

Put a spending limit on your card

Now that the Central Bank of the UAE has raised interest rates, changes to credit card interest rates typically follow, usually within a billing cycle or two, says Vijay Valecha, chief investment officer at Century Financial.

A great tip is to limit spending on your credit cards. This stops you from overspending and encourages you to reassess your daily expenditures in advance and reduce the interest paid on your loans, he adds.

Save for an emergency fund

Families should always have sufficient funds to meet unforeseen events. Ideally, individuals should save 25 per cent to 30 per cent of their income, according to Mr Valecha.

It’s important to save up for an emergency fund of at least six months’ worth of expenses, Mr El Am says.

That way, if you lose your job or have a health emergency, you won’t have to cash out any of your long-term investments, such as your retirement fund, he adds.

Use cash instead of cards

This simple, yet effective, method allows you to budget better for your purchases as it’s easier to track exactly how much you’re spending, Mr Rachit says.

“The tangibility of hard cash also works as an eye-opener as to how much remains with you after expenditure,” he says.

“Additionally, if the interest accrued over time on credit cards is not paid in a timely fashion, it could end up being a big additional cost.”

Set up a monthly investment plan

The best way to combat market volatility and not overexpose your money to any single market condition is to invest regularly, Mr El Am suggests.

“When you invest every month, sometimes you'll invest when the markets are high and sometimes when the markets are down. Since the markets have an upwards trajectory in the long term, you’ll soften the impact of mistiming the market,” he says.

“Investing regularly also gives your investments time to grow with market appreciation and compounded returns. If you only started investing later or waited to time the market, you’d have to invest more each month to get the same returns.”

Finance experts recommend setting up an automatic transfer from your bank account to your investment account.

Many asset classes function effectively in inflationary conditions. Historically, tangible assets such as commodities and real estate have been considered good hedges against inflation, says Mr Valecha.

“Investing in different types of assets will help you recuperate and balance any losses that you might incur as opposed to relying on one investment to perform positively regularly.”

Lock in rents for longer period

It is typically a household’s most significant monthly outlay, if they pay a high rent or mortgage.

You might want to think about relocating to a new, less expensive home or refinancing your mortgage at a reduced rate if it represents more than 25 per cent to 30 per cent of your take-home pay, Mr Valecha says.

“To take advantage of any future price increases by the landlords, the family can also think about locking in their rent for longer,” he adds.

Devise a plan for your saving goals

With a dedicated savings plan, you can plan for near-, mid-, and long-term goals. That may be for an upcoming holiday, a house deposit in five years, or retirement in 30 years, according to StashAway’s Mr El Am.

“For short-term goals, you might only save your cash in a low-risk, high-interest savings or cash management account,” he says.

“A low-risk account safeguards your cash from any short-term volatility. It ensures that your funds are available when you need them.”

But for long-term goals, investing money in a diversified investment portfolio allows your capital to benefit from an appropriately higher level of risk and return over a longer period, Mr El Am says.

Any interest, dividends and market returns on your principal amount can be reinvested and compounded over time.

These compounded returns start to grow in the long term, helping you reach your goal faster than if you were to leave your savings in cash, he adds.