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What’s the point of having a tax-free country when UAE residents are not saving money?

UAE has been very kind towards it’s residents. There are almost no developed countries in the world with a higher standard of living where you have 0% income tax, 0% capital gain tax and 0% inheritance tax. What is going on in the UAE? Residents are complaining about not saving money and that things are expensive. Is this really true? Is it really not possible to save money in a tax free country? Or is something else going on? We need to get to the bottom of this and find the root cause of the problem by analysing data and looking at facts instead of focusing on rumors, opinions and fake news.

According to a survey 77% of the UAE residents are saving some money. 27% is saving 20% or more of their annual income. 18% is saving between 11-20% of their income and 32% saves up to 10%. We need to remember that this is a tax free country. According to KPMG the global average income tax rate for 2016 was 33.36%. This means that even after the UAE government has waived their right to tax their residents, 73% of the residents are still saving significantly lower than the average world income tax.

The top 3 ways in which UAE residents are saving are through savings accounts, investments in property and fixed deposits. A savings account is your cash in the bank, and is ultimately the safest option to avoid a significant loss on an investment, however the issue would be that it will not grow since the average interest rate you will get for a saving account is 0.178%. This means that it will take you 256 years to double your savings. Property is a good asset class and can give rental yields and asset appreciation. Unfortunately many people have found out the past years in the UAE that the real estate market is not always moving upwards. For example, a house or apartment purchased in 2014 for $250,000, could now be worth $200,000. You have lost $50,000 in asset value. Rental yields are calculated after deducting your total cost. When you buy a property financed you need to pay an interest rate + Eibor in the UAE (which is an interest rate towards the central government bank because the dirham is packed against the dollar) and maintenance fees. An average mortgage interest rate is 4% and if Eibor is 0.75% and your maintenance fees 1% then your fixed cost is 5.75%. Remember, the cost if guaranteed and fixed, the rent on the other hand is based on the rental market, not fixed and guaranteed.

Getting a capital growth on your savings when you buy real estate is therefore not automatically guaranteed. Real estate is deeply affected by economic swings and the Oil & Gas industry which the country is still heavily dependent on. You must make the right decision on multiple fronts after doing a lot of independent research and calculating your expected return on investment. Fixed deposits are an agreement with a bank in which you agree that you will leave your money with them for a period of time and you can not withdraw it. In return they will give you a fixed interest rate for that period of time. Most banks in the UAE will not give you a higher fixed deposit interest rate then 2%. Your money is locked in then typically for 36 months. With a 2% interest rate it will take you 36 years to double your savings. 

41% of the UAE residents are sending their savings back home. 24% keeps their savings in the UAE and 35% do a combination of both. The World Bank estimated that UAE residents sent a whopping $19 billion dollar back home in 2016. The top reasons why UAE residents save money is for financial security (51%), retirement (38%), children (38%), a life event (29%) and travelling (28%). 

Unsurprisingly we see that 75% of the UAE residents are not happy with their current savings and 83% plan to save more in the next 6 months. Sounds like a good plan, right? I don’t think the majority of them really want to save money and the reason why I say that has to do with the next part. 

When asked to UAE residents what could encourage them save more? The response a higher salary (59%), lower rent/accomodation costs (35%), better saving options (34%) and automated savings program (18%). Do we see something missing here? Saving is an attitude and requires discipline. I don’t see anybody mentioning that their attitude should change towards saving and that they should be more disciplined and prioritize this more in their way of living. No self reflection. I have come across multiple clients that save 70-80% of their gross income!  Do you think they are living an inferior quality of life? No, they are living in good locations, have proper transport and travel. How come they are saving 70% of their gross income? It’s their attitude and discipline combined with almost a scientific method in budgeting and tracking what they are earning and spending. They are in control of their spending,  not the other way around. They don’t unrealistically hope for a higher salary. Why would your company suddenly pay you more for the same job? The rents are already dropping in the UAE and still people are not happy.  
*source real estate tracker REIDIN

I can share methods and ideas on how you can save money and invest your savings to maximize growth. This can come from a reduction in existing fixed cost or a realignment of priorities on spending, all without sacrificing the things that are important to you. But even with all the tools and knowledge, this cannot be accomplished without a change in habit and mindset. The higher salaries in UAE are not the only change in an expat’s life, the need to spend more comes with the increased disposable income. Spending more on its own is not dangerous, however this should be aligned with your specific needs and wants, not originating from some abstract notion of what people are supposed to do in UAE. 

Saving money when you are not used to it is not easy for everybody. Can you learn it? Yes, but it requires just a plan and a target, just like any project at work. You must have a strategy in place and be committed to achieve your goals. What’s the difference between great ideas that never work out and other ideas that become successful? It’s execution. 

1 comment (Add your own)

1. Suvashis Mukherjee wrote:
Actually savings rate are higher in developed countries than more expensive semi developed countries like UAE . The reason is simple , the government in developed countries tax higher but build a strong social security and infrastructure system which needs longer implementation and payback time .
In countries like UAE there is also a large income disparity compared to the rich European countries .
There is also a minimum cost of living which impacts the low income group in UAE .
If UAE and Gulf economy need to move out of Oil dependance, then they need to create a investment cess pool , meaning all incoming/outgoing money money and economic activity need to pay this cess to build a future surplus but deeply on longer return public benefit project .

Wed, January 3, 2018 @ 6:04 PM

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