The principle of “one size fits all” does not apply in the world of personal finance as people's circumstances, earning potential and risk appetite are unique, according to financial experts.
Although a person’s salary is a significant factor that influences their investment choices, it is not the sole determinant. Other factors include personal financial goals, risk tolerance and time horizon, experts add.
“The income bracket doesn’t influence what you can invest in, your savings rate does,” says Carol Glynn, founder of Conscious Finance Coaching.
Steve Cronin, founder of DeadSimpleSaving.com, agrees and says salary levels are almost irrelevant compared to what you can save and invest each month.
Someone earning Dh10,000 ($2,722) and spending Dh5,000 has more to invest than another person earning Dh40,000 and spending Dh38,000, he says.
However, 67 per cent of both millennials and Generation Z said their salary is the most important factor in building wealth, according to a survey of more than 1,000 Americans last month by financial services company Empower.
Younger generations chose salary above other wealth-building factors, such as being debt-free, job stability and living below their means, the survey found.
But just how much of your income should go towards investing?
Most personal finance experts recommend the 50:30:20 approach for cash flow planning, which suggests that an individual sets aside 20 per cent of their income for savings or other financial goals.
“My recommendation is that the individual first starts working on an emergency fund, which can be anything from three to six months of their monthly living expenses,” says Ms Glynn.
“Ideally, this money is parked in an interest-bearing, but liquid bank account. There are some great options on the market at the moment, with some offering up to 6 per cent interest per annum.”
For those looking to park money that is earmarked for the short to medium term – between two and five years – Ms Glynn recommends a “safe investment” such as a high-interest savings account, low-cost bank or government bonds, or term deposit.
If you don’t need your savings for more than five years, she suggests exchange-traded funds. But it needs to be a long-term plan and all dividends must be reinvested during this time to allow for the power of compounding to work its magic, she says.
“While salary is a significant determinant, it’s essential to align investments with personal goals, risk tolerance, and market conditions,” says Joseph El Am, general manager of digital wealth manager StashAway Mena.
People looking to secure their financial future through investing must start early to benefit from the power of compound interest.
They should also opt for a systematic investment plan to reduce the impact of market volatility, diversify across various assets to manage risk and set clear goals to help decide on an appropriate risk-return strategy, according to Vijay Valecha, chief investment officer at Century Financial.
However, before investing, individuals must address their debt and build an emergency fund to avoid selling their investments during market downturns, he advises.
“Young, single individuals with high disposable income can opt for aggressive investments such as equities, real estate and commodities that have high growth potential [but also higher risk],” Mr Valecha says.
“However, family-orientated earners in their late 30s or early 40s may choose a more moderate strategy. As the disposable income bracket increases, the portfolio can shift towards a more aggressive approach, provided the funds are not required in the near term. Likewise, as one nears retirement, a gradual shift to a conservative approach is advisable.”
Here, financial experts identify investment assets for people in different salary brackets.
Salary bracket: Dh5,000 to Dh10,000 per month
For those in this income bracket with a limited disposable income and lower risk tolerance, opting for safer investment options is prudent to ensure steady savings growth, Mr Valecha suggests.
“A savings account is an essential foundation for anyone starting their financial journey. While the principal amount is secure, it doesn’t earn much interest,” Mr El Am from StashAway says.
“As a rule of thumb, keep about one to two months of expenses in your bank account. Holding too much cash in your bank means that your savings are decreasing in value due to inflation.”
Open a basic savings account with local banks such as Emirates NBD, Abu Dhabi Commercial Bank, or Dubai Islamic Bank. These accounts offer modest interest rates and easy access to funds, Mr Valecha says.
Consider investing in UAE National Bonds, which are low-risk government bonds offering competitive returns. They’re accessible to UAE residents and the minimum investment is typically affordable, he adds.
He also cites National Bonds’ Second Salary savings plan, which allows individuals to make a minimum monthly investment of Dh1,000 per month for at least three years, and receive a monthly return of approximately Dh1,125 for three years.
“It fosters a savings habit and offers a 4 per cent return, a better alternative to low-yield savings accounts,” he says.
UAE investors can also explore US Treasury bills yielding 5.4 per cent with a minimum investment of $1,000, Mr Valecha notes. They can buy these bills from any companies registered with the Securities and Commodities Authority.
“These bonds are AAA-rated for safety and serve as a secure option for short-term cash parking or earning returns on savings.”
Salary bracket: Dh10,0000 to Dh20,000 per month
Fixed deposits are a preferred choice for many as these offer better interest rates than savings accounts, ensuring the money grows, albeit slowly, Mr El Am points out.
Explore longer-term fixed deposits with higher interest rates. Some banks may offer promotional rates for larger deposits or longer tenures, according to Mr Valecha.
“Think about investing in sukuk or Islamic bonds that provide regular income and adhere to Sharia principles. Various UAE banks offer sukuk investments,” he adds.
Both corporate and government bonds offer steady returns with varying degrees of safety. Bonds can also offset some of the volatility of stocks in a balanced portfolio, Mr El Am says.
Meanwhile, he also recommends investing in mutual funds for a diversified portfolio. Depending on one’s risk appetite, one can choose from equity, debt or hybrid funds.
“Consider investing in balanced mutual funds with a mix of equities and fixed income. Look for options from reputable asset management companies like Franklin Templeton, Invest AD, or Emirates NBD Asset Management,” Mr Valecha says.
Mr El Am also highlights money market funds, which invest in short-term debt securities.
They’re a suitable option for those seeking a higher return than savings accounts but with ultra-low risk, he says.
general manager, StashAway Mena
Individuals in this salary bracket can also consider allocating a small portion to US-based equity indices and ETFs like the SPX 500 and SPDR S&P 50 ETF, known as SPY, for diversification, according to Mr Valecha.
The SPX 500 tracks the top 500 US companies, while SPY allows investments in smaller denominations, he says.
“ETFs track indexes, commodities, or bonds and are traded like a stock on an exchange. They offer diversification, much like mutual funds, but with the added advantage of daily liquidity and often lower fees,” Mr El Am says.
Diversified stock market investing is the fastest way to grow your money over the long term, Mr Cronin says.
He recommends a globally diversified stock ETF and a global government bond to stabilise the portfolio against market shocks, such as a crash.
“Sensible stock market investing is for any salary level these days, as long as you can keep transfer costs and platform costs down,” he adds.
Real estate investment trusts, which allow you to purchase property without the hassles of ownership, could be another option, says Mr El Am.
These assets help you earn from the property boom without getting bogged down by tedious administrative tasks, property maintenance, and more, he adds.
“UAE-listed Reits, such as Emirates Reit and ENBD Reit, allow you to indirectly participate in real estate and earn rental income,” Mr Valecha says.
UAE Salary Guide 2023 – in pictures
Salary bracket: Dh20,000 to Dh30,000 per month
Executives, senior managers and business owners often fall into this category, Mr El Am says.
While a well-balanced portfolio of equities and bonds remains key, you now also have the resources to explore more diverse investments, he adds.
He highlights property for its capital appreciation potential and ability to serve as a source of passive income through rent.
“Those planning to settle in the UAE can consider investing in real estate for steady rental yields. However, given the potential global economic challenges and rising interest rates, the sector may not be able to replicate the stellar performance seen in the last two years,” Mr Valecha says.
“Investors in this bracket, with higher disposable income and risk appetite, can allocate a significant portion to both local and international equity markets. They can consider local indices like DFM and ADX, as well as US indices like SPX 500 and Nasdaq 100. Direct stock investments in prominent large-cap US companies are also an option.”
The allure of buying individual stocks and watching them grow cannot be understated, says Mr El Am.
However, it’s a volatile market and one needs to invest substantial time and resources to evaluate each stock. Even the best fund managers can get it wrong from time to time, he warns.
Mr El Am also cites alternative investments, such as cryptocurrencies and collectibles like art and vintage cars, to act as a hedge against traditional investments.
chief investment officer, Century Financial
Professionals in this salary range can also consider investing in regional and global equity mutual funds that match their risk tolerance and financial goals, Mr Valecha suggests.
He also recommends diversifying a portfolio with corporate bonds or fixed-income instruments for a stable income with relatively lower risk compared with equities.
Salary bracket: Dh30,000 to Dh40,000 per month
Investors in this bracket can consider direct investments in stocks on UAE exchanges and international bourses like the Nasdaq and New York Stock Exchange, Mr Valecha suggests.
“High-growth stocks with substantial future potential can be explored. Research is crucial before stock selection, in addition to regular SIPs in benchmark indices,” he explains.
He also recommends exploring foreign investment opportunities like offshore mutual funds, bonds, or real estate investments for diversification.
“Contribute to a company-sponsored employee provident fund or a similar retirement savings plan. Maximise contributions to leverage employer matching if available,” he adds.
Salary bracket and assets to invest in
Dh5,000 to Dh10,000 (per month)
- Emergency fund
- Savings account
- National Bonds
- National Bonds Second Salary savings plan
- US Treasury Bills
Dh10,0000 to Dh20,000
- Fixed deposits
- Sukuks
- Government or corporate bonds
- Mutual funds
- Money market funds
- Exchange-traded funds
- Real estate investment trusts
Dh20,000 to Dh30,000
- Real estate
- Equity markets
- Equity mutual funds
- Fixed-income instruments
- Alternatives like cryptocurrencies, art and vintage cars
Dh30,000 to Dh40,000
- Direct investments in stocks
- Offshore investments
- Retirement savings
Source: StashAway Mena and Century Financial
