Given the economic uncertainties of higher inflation and the introduction of VAT taxes, consumer spending in the Gulf has taken a bit of a battering. The choice is clear – spending more from past saving or controlling budgets and saving more.
For many people, individual reasons for saving are different, whether it is for retirement, supporting children’s future education needs or to having the financial freedoms to do as one pleases. What are common though are the different paths adopted by individuals for building wealth and the manner of saving.
When it comes to savings, there is no right or wrong answer and ultimately it depends on your needs and what you want your savings to achieve. For some investors these needs are met by having a mix or multiple saving vehicles that fulfill short and long term saving objectives, and these are re-assessed on a regular basis to see if the initial saving objectives are being met or not.
Savers have to be both flexible in readjusting their saving targets as well being committed to meeting such targets. With so much on offer in the Gulf, and enticement all around, sometimes such targets seem difficult to meet.
How does one know how much to save and say “enough” has been saved? Again, this can only be answered by each individual investor who has a clear objective on why he is saving, the length of time he can maintain a regular saving plan or time horizon, and the liquidity needs of the individual saver.
These objectives need to be flexible, as individual circumstances might change, or the state of the economy or government policies o for example. As such it is important to stick to a target, but one that is sustainable overtime. Putting aside 50 riyals or dirhams a week is consistently doable, than setting an ambitious target of 1,000 a week only to drop it after a few weeks.
While economic fluctuations and the changes in government policies are outside the control of individuals, the commitment to make savings to meet future needs is within their controlDr. Mohamed Ramady
Saving for retirement
For those saving for retirement purposes, the earlier the saving habit and contributions are made, the better is time on their side in terms of expected future returns and given that there are not many company sponsored retirement plans in the Gulf this makes retirement planning even more important. The difficult aspect of cutting or control of spending is in deciding what one is willing to give up despite impulse spending temptations.
The above might seem difficulty at first for many people, but on closer analysis it is achievable as the key aspect is setting a realistic budget and sticking with it. Once one has had several months of successful experience with one’s budget, one can go to a next higher level of looking at further control of spending.
Throughout, some questions need to be answered such as admitting to oneself that maybe you are spending too much on something and then thinking deeply on why you spend so much on this item? Does it just make you feel good? Is it compulsive purchasing?
The culture of saving has a long history in the Gulf, especially amongst the older generation who passed through harder times than the younger generation, and the mechanism of saving has also evolved over time with increased investment channels, education and financial services availability compared with the favored saving in gold or silver coins in the past.
Market research shows that 90 percent of Gulf citizens feel that it is important to have enough money to live off during retirement. Yet the survey also indicates that only 16 percent feel well prepared for retirement and furthermore that 84 percent of the citizens sampled do not know what their retirement income will look like.
At the same time only 39 percent of the survey participants feel that they understood their short-term finance well, but only 20 percent felt the same about their long-term finances. This indicates that a culture of long term savings has still not taken place in the Gulf.
Periods of higher inflation
The savings ratio is affected during periods of higher inflation. Without exception, the national saving ratios of the GCC countries were affected in 2009 which witnessed some reduction in the national saving levels due to the rise in inflation in the region.
Saving levels rose again from 2010 for all GCC countries when inflation levels fell back but with recent subsidy cuts and introduction of VAT taxes, inflation is again rising in the Gulf, and Gulf borrowing rates also rising as Gulf currencies are tied to dollar interest rate rises.
The security of one’s employment and future job prospects are also important factors in the ability of an individual to save and with the Gulf countries embarking on a more localization of employment policies, this puts expatriates in even a more difficult situation.
However, the introduction of indirect taxes is probably easier to cope with in the short term as individuals have more control by having a choice in either purchasing that commodity or not, or reducing their level of purchase of that commodity and saving more.
All this will influence the ability to save. While economic fluctuations and the changes in government policies are outside the control of individuals, the commitment to make savings to meet future needs is within their control.
One of the major mistakes for irregular saving is that circumstances change and one should plan for these circumstances because they do happen. To save successfully, one has to recognize that one’s choices are vulnerable to these changes and this might force a change of heart in saving behavior.
To overcome this, put your “smarter” self to be in charge: when choosing to save money, rely on your most motivated self to make the right decision. Sometimes the most powerful force is “inertia”, or doing nothing.
In a strange way, financial inertia can be useful if one knows how to handle it, whereby the aim is having to do as little as possible which leads one to adapt the path of least action – namely, instituting automatic transfers to effect regular saving. Doing this makes it out of sight and out of mind and thus acceptable as a habit. Whatever path is chosen it is time for Gulf residents to seriously re-examine their saving habits.
Dr. Mohamed Ramady is an energy economist and geo-political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of “OPEC in a Post Shale world – where to next?”. His latest book is on “Saudi Aramco 2030: Post IPO challenges”.
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