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Views and Insights

Tie the Camel

Faizal Karbani - 27 January, 2020

What’s the point of planning in terms of our financial affairs? What value does it really add?

It’s a bit like saying what’s the point of regularly exercising or eating a balanced diet? The discipline of doing this brings numerous health benefits. Similarly planning and having a level of discipline around your finance brings a huge number of benefits especially in the medium to long term.

As a financial adviser for nearly 15 years, I’ve seen the power of financial planning – people who started by putting as little as £100 per month away into savings, have managed over 5/10/15 years to accumulate significant savings such that they’ve been able to put down a deposit on a house or send their child to University without taking on a Student loan or to build a decent pension.

It’s all about taking the time out and making it a priority to do this. Many of us fall into the trap of thinking I’ll get around to it once I’ve made a bit of money, “we’ll cross that bridge when we have to and somehow things will work out”.

Yes God does promise to help and provide for us; but our side of the contract is that we must make the necessary effort and “tie the camel”. By leaving things to chance and not planning, we can’t claim that we’ve fulfilled our side of the bargain.

Let’s take University fees as an example – these fees are £9,000 per year for tuition and probably around £9,000 associated expenses of accommodation etc. So over 3 years that amounts to £54,000 (£18,000 per year).

If we don’t plan for this, there is a good chance that the student will have to take an interest bearing student loan and start their career after University with a significant debt.

If we had the foresight and discipline to regularly save this financial burden can be managed much more easily; so if someone saved £127 per month from when their child was born and these savings grew on average by 7% per annum, by the end of year 18 – you would have saved £54,000. Amazing, right?

The thing about saving regularly over a relatively long period of time is that there is a really powerful effect of the growth being compounded.

So let’s say you invest £10000 on day 1 and that grows by 7% every year by virtue of it being invested in a portfolio of halal investments. Let’s now compare what happens if you keep the money growing over 10 years without taking anything out versus if you took the 7% out every year:

 

KEEP MONEY IN

Balance £

TAKE GROWTH OUT

Balance £

YEAR 1 10,700  10,000
YEAR 2 11,449 10,000
YEAR 3 12,250 10,000
YEAR 4 13,108 10,000
YEAR 5 14,026 10,000
YEAR 6 15,007 10,000
YEAR 7 16,058 10,000
YEAR 8 17,182 10,000
YEAR 9 18,385 10,000
YEAR 10  19,672 10,000
PROFIT £9,672 £7,000

Can you see the power of the growth being compounded year after year versus taking the returns out every year?

So tucking away whatever you can afford every month really does pay off in the medium to long term. Wages haven’t generally kept up with the increase in the cost of living – I’ve mentioned University fees – other major expenses include buying a home, weddings, going for Hajj and having a pension you can live on. For most people – the only way to negotiate these challenges in a manageable and relatively stress free way is to financially plan and save on a regular basis over the medium to long term.

To drive this point home – the current state pension is about £9,000 per year. This is clearly an insufficient income with which to have a reasonable standard of living. If you’ve failed to plan for your retirement by saving and investing while you are working then you could face a difficult time financially in your retirement.

So in a nutshell the take out message is to take time out, think about what your financial situation is and what you need and want to plan for. Whatever situation you are in – take some action in working towards your goals – budgeting, saving etc. Don’t bury your head in the sand or ignore looking at this; it’s never too late to start working on this!


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