LESSON 1: BACK TO BASICS: BUDGETING // 1

SMARTMONEY smartmoney
Brought to you by Abu Dhabi Islamic Bank - Banking as it should be

A step-by-step guide to a balanced financial life

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INTRODUCTION // 3

Do you have a monthly financial plan? The answer should be yes because planning your financial life is important for your future, your retirement and your family. Although planning your finances isnt always the easiest thing to do, it isnt impossible. You can do it, and the earlier you start, the more money you will have for you and your family. Smart Money will show you how to save and grow your money for the future, as well as reduce your debt and pursue your financial dreams. How? By giving you step-by-step guides to the following:

Welcome
BUDGET SAVINGS

SMART MONEY

FINANCE

ONLY 25% OF UAE RESIDENTS SAVE MONEY ON A REGULAR BASIS

Source: National Bonds PJSC

TAKAFUL INSURANCE
Smart Money is your essential guide to all the financial matters in your life, and it offers easy-to-understand advice on saving, budgeting, financing and growing your money, with top tips on investment, Takaful insurance and finances. Read on to find out more about how you can be in complete control of your money.

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LESSON 1: BUDGETING // 5

Money Matters
Your guide to budgeting

What is a budget?
A simple financial plan that helps you track your expenses and income.

Checklist
To make a personal monthly budget you will need a list of your:

Why? Do you want to:

Increase your savings Reduce your living expenses Save for a major purchase such as a house Retire early Grow your money If you answered yes to one or more of the above, then you need a personal monthly budget to help you increase your savings and manage your expenses.

INCOME: Your total earnings from salaries and investments EXPENSES: The amount of money you spend every month everything from bills and home finance payments to holidays and gift shopping LONG, MEDIUM AND SHORT-TERM GOALS: what you want to save for now and in 5, 10 and 25 years time; e.g. you want to save to do some improvements on your house, for your childs university education, or for your retirement.

Does this sound familiar?

Its the end of the month and Jassem only has AED100 in his bank account. His bills are all due and he wont be paid for another 10 days. Question: What can he do to avoid this situation? Answer: Bugdet!

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LESSON 1: BUDGETING // 7

How to Budget
Work out how much money you are spending and how much money you can save every month
1.

2.

Complete this Personal Budget Table

Jassem Mariam AED25,000 AED12,000 AED6,000 AED7,000 AED10,000 AED35,000 You

STEP 1 STEP 2 STEP 3 STEP 4 STEP 5

TOTAL EXPENSES:

AED60,000 AED20,000 AED6,000 AED20,000 AED4,000 AED50,000

Follow this step-by-step guide and fill in the budgeting table on the far right

STEP 1: WHAT IS YOUR INCOME? Work out how much you earn on a monthly basis, including: Salary Profits from investment Other incomes STEP 2: WHAT ARE YOUR FIXED EXPENSES? Add up what you spend on a regular monthly basis, including: Rent Savings contributions Takaful health insurance Takaful car insurance Takaful life insurance Education Childcare Charitable contributions

STEP 3: WHAT ARE YOUR NON-FIXED EXPENSES? Look at what else you are spending every month, including: Electricity bill Mobile phone/internet bills Car repairs and maintenance House repairs and maintenance Groceries Self-care (hair, toiletries, etc.) Clothing and footwear Prescriptions and medical STEP 4: KNOW YOUR DEPT Calculate your monthly payments for: Islamic cards Home/ Car finance, Other finances STEP 5: WHAT DO YOU SPEND ON NON-ESSENTIAL ITEMS How much do you spend on: Eating out, Entertainment Gym membership and sports Vacations Toys, books and gifts

3.

Nowwork out how much money you have left to save and spend every month
Jassem Mariam AED25,000 You

TOTAL INCOME minus (-) TOTAL EXPENSES YOUR TOTAL RESULTS

AED60,000

minus (-)
AED50,000 + AED10,000

minus (-)
AED35,000 - AED10,000

POSITIVE If you have a positive number, congratulations; you are spending less than you earn. From our example, Jassem has AED10,000 to save or invest.

NEGATIVE If you have a negative number, you need to reduce your spending. Mariam has to reduce her spending by AED10,000 to avoid getting into financial problems.

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LESSON 1: BUDGETING // 9

Managing your Money

Your easy-tofollow guide to living within your means
You should spend less of your income on entertainment and non-essential items if you: Plan to have children Have an expensive hobby, like travel Have a varied income

25% 30% 15% 8% 10% 12%

NON-ESSENTIAL EXPENSES Holidays, gifts ESSENTIAL EXPENSES Food and transport, housing healthcare, education

How to spend your income

Your biggest expense should be your house. You should be spending roughly 25% of your income on home finance payments or rent and homeowners takaful insurance. The chart on the far right shows how you should be spending your income

Housing: Home finance, rent, takaful insurance, bills: 25% Transport: Car payments, fuel, takaful insurance, repairs: 15% Savings: 12% Living expenses: Groceries, food, education, etc: 10% Personal finance payments: 8% Clothing, eating out, vacations, gifts, entertainment: 30%
Source: MSN Money and Oprahs Debt Diet

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LESSON 2: FINANCE // 11

The Good & the Bad

When is it okay to get finance?
When you buy something that has no potential to increase in value, thats bad finance. Good finance is an investment that creates value. Youll then be free of financial obligations and the profit you make will be yours to keep.

SPENDS MONTHLY INCOME STUCK IN A DEBT CYCLE

GET FINANCE

Three productive and value added purposes for financing:

Home finance Because homes usually increase in value, getting finance for a house is usually a sound investment. Education finance Student finance facilities to pay for college or university tuition are good, because a degree will usually result in you earning more money over the course of your lifetime. Business finance Using finance to start a profitable business is a wise thing to do, because when you start making money, you can make the payment.

Non-productive purposes for financing:

You should afford to pay these expenses by your own income not by a financing scheme Go on vacation, buy a designer purse, shoes, etc., Pay off other finance (unless youre undergoing finance consolidation with better terms), Buy gifts.

DEPT
OWES MONEY ON MISSED FINANCE PAYMENTS

THE

CYCLE

CANT AFFORD FINANCE PAYMENTS

The reason you should not finance any of the above items is because none of these increase in value. Instead of using finance, save up your money and pay cash. Other unavoidable expenses that may need financing; marriage, car, furniture, medical treatment.

TAKES OUT MORE FINANCE TO PAY OFF LIABILITIES

The Dept Cycle

This diagram above illustrates how you can get into serious financial difficulties if you do not finance responsibly and budget correctly.

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LESSON 2: FINANCE // 13

Know the Risks

Think carefully before you take out finance
Checklist
Before you get finance, answer the following questions Can I afford the monthly payments? What would happen if I lost my job? How long will it take me to pay the finance? Am I being charged high rates on finance? Remember this, and you will not get into serious debt: Spending less than you earn is the key to all affordable personal finance Only get finance when you are sure you can afford the finance payment

Dept-to-income percentage
Your total personal financial obligations (the amount that you owe in full) should be about a third of your total annual income. This total figure includes housing, education, car finance and card finance. Example: Jassem earns AED 480,000 a year, so his financial obligations should not be more than AED160,000.

Here are a few reasons how you could be unable to make your finance payments. If this happens, the money that you owe will increase on a monthly basis and you could end up in serious debt. Serious illness or unforeseen events Redundancy or loss of income New baby or moving house

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LESSON 2: FINANCE // 15

Finance Payment Plan

The longer you take the finance, the more it will cost you, so you should try to get the shortest finance and get out of the finance scheme as fast as possible through early settlement.
1. List your finances

Stay in Control
Your quick guide to managing finances
Do you have a finance facility? Are you struggling to make your payments? If you are, here are some tips to help you clear your finances as quickly as possible. DO Try and consolidate all your finances into one finance scheme Check all the fees charged by the bank before you take out any finance Try to balance your finance to reduce the monthly payments Try to pay the full balance every month on your card or prepay the card with your funds (covered card) DONT Use your card to buy goods you cant afford Use your card overseas before checking the currency conversion fees and prices charged Miss a payment on your card

Name of finance Finance 1 Finance 2 Finance3

How much you owe AED11,000 AED97,000 AED36,000

Monthly repayment AED450 AED1,450 AED720

2. Now list your finances in order of highest to lowest profit rate Finance 2 Finance 1 Finance 3 AED1,450 AED450 AED720 Bank Profit Rate: 6.5% Bank Profit Rate: 5.7% Bank Profit Rate: 4.5%

You should try to find money in your budget to pay the finance that has the highest profit rate first.

3. Look at your budget and see if

4. Add this amount to your

you can find some extra money each month for finance payment. Note that amount here:
Save AED405 extra per month

payment for Finance 1. My new payment amount for Finance 1 is:

New total to spend on finance 1 is AED1,855

When Finance 1 is paid off, add the payment amount to your payment for Finance 2. When that is paid off, add the amount to Finance 3, and so on.

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LESSON 3: SAVE AND GROW YOUR MONEY // 17

Savings Plan
How to save as much money as possible
Why save Money?
SHORT-TERM (0-5 YEARS) Emergencies Vacation
Spend after you save, dont save after your spend. Its simple savings should be your priority, so dont just say that youll save whatever is left over at the end of the month. As a general rule you should aim to save at least 12% of your monthly income; if you can afford to and you do not have finance payments you should save 20% of your monthly income.

What are you saving money for?

Complete the table below to work out your personal financial goals. Weve completed a couple of examples for you to help you on your way
Goal Buy house Timeline 2 years Cost AED100,000 Monthly savings required AED4,166 AED5,000 AED2,083 Priority (1-5) (1) (2) (3)

(down payment)

Holiday in Europe Retirement

6 months 30 years

AED30,000 AED750,000

am Pyr id o fn s eed for the u fut re

MEDIUM-TERM (5-10 YEARS) Saving for a house New car Marriage

LONG-TERM (OVER 10 YEARS) Retirement Childrens education Business opportunity

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LESSON 3: SAVE AND GROW YOUR MONEY // 19

Super Saver
How to save more money

Tips for successful saving

1. Set realistic savings goals 2. Open a separate savings account to keep your savings away from your everyday money 3. Set up an automatic payment so the money goes into your savings account on pay day 4. Start small if you save regularly, even the smallest amount can soon add up

Money Saving Options

If you want to access your money easily and you want to invest in a safe way then you should save your money in one the following ways:

SHARIA COMPLIANT SAVINGS ACCOUNT Keep your money in a Sharia compliant savings account where you can access your money any time and you may benefit from good generated profit. PENSION PLAN Start early and save for your retirement as soon as possible to make sure you have enough saved. Make monthly payments into a Sharia compliant pension plan.

SUKUK This is a Sharia approved savings scheme. When you buy a sukuk from a bank or government, your money is invested in a project. Once this project is completed and making revenue, you receive your money back and your share of the profits. If you buy a sukuk for AED1,000 today, in five years time you may collect your AED1,000 plus AED500 in profit.
The bank is liable for a loss in the case of misconduct, negligence or breach of contract

EMERGENCY SAVINGS ACCOUNT Open an instant access bank account where you can access your money within 24 hours to pay for unexpected emergencies. Keep three months salary in this account to cover emergencies.

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LESSON 3: SAVE AND GROW YOUR MONEY // 21

Growing Your Wealth

How to multiply your money

Why you need to grow your money?

Although budgeting and saving your money will help you to build personal wealth in the short-term, you will need to invest your money to help meet your long-term goals which are more expensive such as paying for your childs education or your retirement. What you are investing for and when you are going to want your money will determine how you will invest. For example, saving to buy a car in two years time requires a completely different investment strategy than saving for retirement in 20 years. To save for a car you would invest in a savings account, but to save for your retirement you would be better off investing in Sharia compliant shares or property.

Sharia t complian stocks

Sharia t complian ities commod Sukuk

te Real Esta

Where can you grow your money?

Sukuk Sharia compliant stocks Real Estate Sharia compliant commodities Work out how much risk you are prepared to take with your money. The more risk you take, the more money you are likely to make; but remember that you also run the risk of potentially losing more money. You need to select an asset allocation strategy that is right for you: do you risk investing all your money in one place to make more money, or do you take the safer option of placing smaller amounts in a variety of investments?

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LESSON 4: INSURANCE // 23

On the Safe Side

How to protect you and your family financially with Takaful insurance
The next time you apply for home or personal finance, you may be asked if you want to get Takaful credit insurance just one of several insurance options available to protect you and your family from falling into debt. Takaful is a Sharia-compliant, Islamic insurance policy which can be taken out for covered cards and cash cover.

Takaful will give you peace of mind that your family will always be financially secure, whatever happens.

What will it cost me?

You will be asked to make monthly takaful contributions, which are usually based on things such as the amount of the finance and your age.

Do I have to take out Takaful insurance when I get finance?

It is usually optional, and before deciding to get Takaful, you should ask: How much will it cost? Will the insurance cover the full length of your finance and the full finance amount? What are the limits and exclusions on payment of benefits? Can I cancel the insurance?

Reasons why you may be unable to make payments on your finance:

T

UNEMPLOYMEN

This insurance cover will:

Pay off your finance if you die Pay a monthly sum of money to the bank that is equal to the finances minimum monthly payment if you become disabled or involuntarily unemployed

DISABILITY OR SICKNESS

DEATH

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LESSON 4: INSURANCE // 25

Takaful versus Conventional insurance?

Stay Protected
What other Takaful insurance options are available?
You can also protect yourself and your family with a variety of other takaful insurance policies that cover Life, Car, Home, Finance and Health.

CONVENTIONAL INSURANCE MODEL Risk transferred to insurance company itself against the insurance premium
Policyholder/pay premiums Insurance company invests premiums in various investment funds

Premium

Takaful Life Insurance

A Sharia compliant life insurance policy will protect your family financially in the event of accidental or natural loss of life. This means that your finances will be paid off by the insurance company from the takaful account and your family will receive monthly or a one-off payment/s to cover their living expenses. Coverage can include: Death due to any cause Accidental death Permanent Total Disability (PTD) due to accident or sickness Permanent Partial Disability (PPD) due to accident or sickness Temporary Total Disability (TTD) due to accident or sickness

Claims to be paid to cover policy holders

INSURANCE COMPANY
Surplus or profit retained by insurance company will be paid as claims

What are the advantages of insurance?

Peace of mind It is available to everyone, regardless of their insurability If you run into debt, you can get financial help with making your payments

VERSUS TAKAFUL WAKALA MODEL Risk shared between participants on donation basis and the premium is paid to the takaful account owned by the participants, not the company
Wakala fee to be paid

Takaful participants Contributions to be paid Claims to be paid to Takaful participants Surplus will be distributed to the policy holders

Takaful Company

What are the disadvantages of insurance?

Monthly payment (takaful contributions) can be high

TAKAFUL ACCOUNT (POOL)

Investment contributions in Sharia compliant investment

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ISLAMIC BANKING GLOSSARY // 27

Jargon Buster
Islamic Banking
A banking system that is based on the principles of Islamic law (also known as Sharia) and guided by Islamic economics. Two basic principles behind Islamic banking are the sharing of profit and loss and, the prohibition of the collection and payment of interest.

Islamic banking made simple

Ijara

Murabaha
A sale contract, in which the Bank sells to a customer a physical asset at a selling price that consists of the purchasing cost plus a mark-up profit.

A lease contract whereby the Bank leases to a customer a service or rented physical asset either exists currently or to be constructed in future for a specific period of time at specific rental installments. The lease contract could be ended by transferring the ownership of a leased physical asset through an independent mode to the lessee.

in a project, during which the Bank enters in particular arrangements with the customer to sell him its share in this partnership until he becomes the sole owner of it. Profits are distributed according to the mutual agreement of the parties as stipulated in the contract; however, losses are borne according to the exact shares in the Musharaka capital on a pro-rata basis.

of the Wakala for a fixed fee in addition to any profit exceeding the expected profit as an incentive for the Wakil for the good performance. Any losses as a result of the misconduct or negligence or violation of the terms and conditions of the Wakala are borne by the Wakil; otherwise, they are borne by the principal.

Mudaraba
A contract between the Bank and a customer, whereby one party provides the funds and the other party invests the funds in a project and any generated profits are distributed between the parties according to the profit shares in the contract. The Mudarib is responsible of all losses caused by his misconduct, negligence or violation of the terms and conditions of the Mudaraba; otherwise, losses are borne by Rab Al Mal (owner).

Sukuk
Certificates which are equal in value and represent common shares in the ownership of a specific physical asset or in the ownership of cash receivables of selling an existingowned asset, or in the ownership of goods receivables, or in the ownership of the assets of Mudaraba or Partnership companies. In all these cases, the Sukuk holders shall be the owners of their common shares in one of the above.

Qard Hasan
A non-profit bearing loan enables the borrower to use the borrowed amounts for a specific period of time, at the end of which the same borrowed amounts would be repaid free of any charges or profits.

Istisnaa
A sale contract, in which the Bank sells an asset to be developed using its own materials to a customer at a specific price and to be delivered on a specific date. This developed asset can be either developed directly by the Bank or through a subcontractor and then it is handed over to the customer.

Zakah
Zakah is the third pillar of Islam. it is necessary to calculate and pay as part of managing ones money, being calculated on a yearly basis of 2.5% subject to the various conditions of the Sharia pertaining to Zakah.

Wakala
A contract between the Bank and a customer whereby one party appoints the other party to invest certain funds according to the terms and conditions

Musharaka
A contract between the Bank and a customer to enter into a partnership

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Quote, Unquote
Smart Comments About Money
You have not lived a perfect day, even though you have earned your money, unless you have done something for someone who will never be able to repay you. Never spend your money before you have it.

ADIB wishes you a financially stable and successful future. We believe that your success is the only source of our own, and we hope this booklet will help you to prosper and succeed financially. Let us know your feedback, and please contact us for any further financial advice.

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