The National-What are the best investments based on your salary bracket?

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.

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.”

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.”

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.”

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.

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.

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.

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.