It’s really easy to get overwhelmed when thinking about your finances. As a result, you end up not really doing very much planning at all and staying stuck in a financial rut with no real plan.
I want 2022 to be your year.
So I set myself a challenge. To come up with an easy-to-follow guide that would allow Muslims to quickly and easily understand where their money should be flowing. Whether that’s budgeting, saving, investing or spending – and coming up with a plan for it all.
That’s what this article is about. In writing this piece, I’ve piggybacked off the great work from the guys over on the Reddit UK Personal Finance section with their flowchart. I’ve made some tweaks of my own and tailored it to a Muslim audience.
It goes without saying (but I’ll say it anyway) that this is not a substitute for personal financial advice and it is not intended to be. This is intended as general guidance using well-understood financial principles.
Right, let’s get into it.
Step 0: The Foundations – budget & be savvy
If you’re into cricket, think of this like putting on your helmet and pads, warming up and being confident that you’ve done your opposition research. It’s the basic foundation work.
And it’s the most often-overlooked part of creating wealth. There’s a fantastic book called The Millionaire Next Door. The authors spent time studying wealthy people. To their surprise, most of them weren’t in rich, fancy areas. They were average people who had diligent financial rules and accumulated wealth that way.
The key takeaways for this bit are:
- cover off your essential expenses (no, Netflix is not essential). Essentials are things like food, rent/mortgage, electricity, commuting expenses etc.
- understand where your money is going. Try creating a spreadsheet for yourself or download an app like Money Dashboard (on Android or Apple). This will visually help you;
- set aside a day each month to check your finances (using your spreadsheet or Money Dashboard or whatever). Make it a habit, get your spouse involved if you are married. It will help you both. Money is a big cause of arguments, potentially serious ones – so it’s good if you’re both on the same page. It’s not helpful if one person out of the couple “handles all the finances” and the other person is just in the dark. It also makes it easier when you need to make hard decisions like cutting spending;
- build an emergency fund of at least 1 month’s essential outgoings to cover a worst-case scenario like job loss;
- if you have fallen into any haram, high-interest debt (particularly if it puts your home or anything at risk) then start a plan to pay this down regularly;
- really and truly analyse all your outgoings and call into question anything non-essential. Cull it if you can.
This step is really all about just getting a proper understanding of your financial picture. You should know, pretty much to the penny, what your essential expenses are after this.
In my experience, here’s where a lot of people fall down. If you can identify with any of these, then take stock:
- Car Leasing. Look, I know it’s nice to have an E-Class in the drive. And I know it only costs £400 per month – you can easily afford that! But car leasing only makes sense in some pretty rare circumstances.To my mind, you’re better off: (a) if you really want a fancy car, buy one that’s 2-3 years old that’s great spec and in great condition but only if you’re going to keep it for a long time; or(b) put aside your pretences and buy an older, cheaper car. Not a rubbish car. But a sensible one. I bought a 2007 Audi A6 in Jan 2016 that cost me £4,950. Even if it only lasts 4 years (1 month to go at the time of writing) in total and I receive nothing back for it, it will have cost me £103pm.I know you’re going to throw the repairs and other expenses cost back at me but I’ve not had anything major alhamdulillah.In reality, I’d probably get around £1.5k – 2k back for it I think, so if it lasts me just 4 years, it will have cost me £61-£71 per month excluding my maintenance costs (which I admittedly haven’t been tracking but aren’t anything out of the average).In the equivalent period for a lease, I’d have probably paid out at least £14,400 (assuming a £300 lease per month and not even including any maintenance, admin costs or the up-front (non-refundable) deposit etc).Thinking about it now, that extra £10k or so liquidity is what helped my wife to buy her small business. A business which is an income-producing asset, not 4 wheels on a drive depreciating away.I’m not saying leasing cars is wrong, I’m just saying think through the process fully and make choices with your head, not because you want to look good in your car.
- Holidays. They’re great. I love them. But sometimes there are times you have to tighten the belt and understand that the £3k you’re about to spend on that holiday may be better served paying down some debt or something more boring. They’re on the luxury end of the spectrum.
- General needless expenses. We all incur them, and they’re part of the fabric of life. Contrary to what it sounds like, I’m not saying we shout live like hermits. But maybe limit those £100 per head meals to once a quarter instead of monthly or half-yearly instead of quarterly. Perhaps don’t get a takeaway every week this month. Or cut down on the daily coffee shop trips. It’s all food-related stuff that’s come to me there but there will be other types of needless expense too.
You should now have a picture of how much is left after all these essential expenses.
Step 1: pay off urgent debts/build your emergency fund
To continue the cricket analogy (sorry non-cricket fans), this is the start of your innings. The first few deliveries where you’re trying to gauge the pace and bounce of the wicket. And trying to avoid a golden duck.
As a Muslim, there’s two really important reasons we should worry about debt:
- the Prophet (SAW) warned heavily about debt:The Prophet (peace and blessings of Allaah be upon him) refrained from offering the funeral prayer for one who had died owing two dinars, until Abu Qataadah (may Allaah be pleased with him) promised to pay it off for him. When he saw him the following day and said, I have paid it off, the Prophet (peace and blessings of Allaah be upon him) said: “Now his skin has become cool for him.” Musnad Ahmad (3/629); classed as hasan by al-Nawawi in al-Khalaasah (2/931) and by Ibn Muflih in al-Adaab al-Shar’iyyah (1/104). (Source)
- Sometimes, our debts are unfortunately interest-bearing. The paying and receiving of interest is of course strictly forbidden in Islam.
With that backdrop, I’m deviating from the Reddit flowchart a little here. My preference here Islamically is to prioritise paying off debt, in particular anything that’s interest-bearing.
If you have borrowed from family and friends, without any interest, then that is less urgent. But as a matter of general principle, you should have a plan in place for this too. Even if they are lenient about when to return the money, it’ll be a big monkey off your back once you’ve got a plan in place to get it sorted.
My practical advice here is as follows in a list of potential options:
- Set up regular direct debits that you can commit to. If you are paying off interest-bearing debt, at least you’re on a path to getting those out of the way. If you are paying off family and friends, at least they know repayment is occurring. You’ll probably feel some relief too.
- If your debt relates to family and friends, a slightly higher-risk move would be to set aside a monthly payment, but invest it. For example, you could set up a Wahed account (if you do, then please use our link as it helps us), and put the regular payments in there knowing that the money will be put to work. If you go for an equities fund (i.e. a fund that invests in the stock market – usually the aggressive/very aggressive strategy for Wahed), then you may well grow the money over the course of a year by 7% or so.The risk here though is that you don’t spend enough time in the market to get your returns (e.g. you invest and the stock market has a bad year or a stagnant year). Stock market investments tend to work best when you’re leaving it for a while. So if it’s just a short-term path to repayment (a year or less), then probably easier to stick to cash.But if it’s longer-term, definitely look into investment. You should speak to the person to whom you owe money about this first though – and you should be prepared to cover the losses if the investment goes south.
- Sort your will out. That hadith above is enough to spark action. I’d want to be recording within the will – or in a separate document – all my debts. And then make sure your executors pay them off from your estate, or that a family member is kind enough to cover them.Our very own wills service means you can do your Islamic will at home in 30 minutes. It’s suitable for the majority of people in the UK, compliant with English and Islamic law and costs just £98. Check it out here.
Alongside that, just make sure you are building a small emergency pot to make sure you can cover your fixed outgoings in case you lose your job or something drastic like that.
Step 2: short-term goals
Once you’ve covered off step 1, you start turning your mind to your short-term goals. Hajj? House? Wedding? Kitchen renovation?
This is the part of your innings where you’re “getting in”. Trying to get to that 30 runs or so where you’re well set.
There’s a few things on a Muslim’s mind depending on the stage of life you are at. Generally speaking, younger people tend to have more typical short-term goals (particularly buying a house). As people accomplish these goals, you either start to have different short-term goals (e.g. buying a business, improving your house, etc) or you go to step 3 – long-term goals.
So have a think now – do you have a short-term goal? If no, go to step 3. If yes, keep reading.
It’s not rocket science to say that short-term goals require saving up. There’s little more to it than that. Just set aside a certain monthly amount from your salary. If you’re saving for a house deposit, check out the IFG top tip later on.
Practical tip: the way I have historically saved for short-term goals is in a separate joint bank account that my wife and I have. We conduct our day-to-day financial lives in our own separate bank accounts and don’t mingle them (I’ll cover why in detail in a separate article). But when we are saving for a short-term goal, particularly one we are both contributing to, then the visibility of a separate bank account that starts from zero and builds up is nice.
At this point of the savings journey, the Reddit flowchart suggests finding the highest-paying interest savings account for these short-term cash savings. Of course we can’t do that as Muslims!
What is a Muslim to do then to get a return on cash savings and get to the goal quicker? The key here is to make sure that whatever you do, you can quickly and easily take your cash back out. A few ideas (feel free to contribute more ideas in the comments):
- Low risk: open up a sharia-compliant savings account. Just make sure that you can take out the cash quick enough. E.g. you don’t want a 6-month notice account if you know you’ll need the cash at much quicker notice.
- Medium risk: invest in a sukuk fund (via Wahed). Note: sukuk funds are generally considered low-ish risk but I’m putting in the medium risk category here because there’s a risk that the value of the fund will go down and because you might only have your money in for a short time, you wouldn’t get a chance to stay invested long enough for it to recuperate.
- High risk: invest in short-term sharia-compliant loans to businesses. This has existed for a while on the mainstream side where individuals can lend to businesses. But we’ve seen some activity on the Islamic side too. You can get great returns with this investment class (1%-1.5% per month) but it’s higher risk than the other options I’ve mentioned. We don’t invest in this ourselves yet, but when we do we will let you know. Click here to register interest in investing in this sort of thing and we’ll let you know when we have any updates in this area.
IFG Tip: if you are saving for a deposit as a first-time buyer, set up a LISA. Read our article on how to make sure it’s halal here
Step 3: long-term planning
In cricket terms, this is what gets you to the century and beyond!
Ok so there’s a few really key things here. But the key principles to remember are that time is your advantage and you just cannot beat consistent, long-term actions when it comes to saving and investing.
Step 3.1: get into your workplace pension
Pensions are such a quick and easy win that I feel so disheartened when I hear people opt out of them. Why do Muslims opt out? Two reasons I hear all the time: 1) They’re haram (or I’m not sure if they are), 2) I need the money now.
Here’s why both those reasons are wrong.
Firstly, a workplace pension, like an ISA, is just a label. It’s like saying drinks are haram. No, it depends on what’s in the bottle. Workplace pensions are halal as long as what the provider is investing in for you is halal. So get on the blower to your workplace pension provider and tell them to put you into a sharia-compliant fund. If they don’t do that for you, get in touch with us. We’ll have a chat to them.
The second objection about needing money is a more compelling argument. I can accept this, but only in about 0.5% of cases to be honest. Like if there’s a short-term need for that liquidity for some emergency. But if it’s just because you prefer to see the money now than tuck away for your future, then you need to get out of that mindset quickly.
The reasons pensions are such a no-brainer is because of the employer matching your contribution. This varies from employer to employer but the minimum statutory is enough. If you contribute 5% of your pre-tax salary, then your employer matches 3% of it. So if you earn £4k per month pre-tax, you’re committing £200 and your employer puts in £120. That’s an immediate return on your investment of 60%! Name me another asset class that does that.
Not only that, that £320 then goes into an investment (which you’ve made sure is sharia-compliant). The stats tell us that stock markets average around 7% a year. So let’s do some quick calculations to understand the power of what we are achieving here. This is assuming your salary and everything stays the same, so this scenario is conservative.
- £320 goes in your pension every month as outlined above. That’s £3,840 per annum.
- Over 35 years you save £134,400. But you’ve only contributed £84,000 of that.
- And because the money has been invested (assuming a 7% annual return), guess how much your final balance is? £550k.
Have a play around with this calculator to understand. Just be sure to change the compound frequency to annual if you are basing it on annual returns (which we are in my example).
All that with £84k of your money. This is what I mean about consistent, long-term actions being the key!
Step 3.2: long-term investments
If you’ve got your pension sorted, you can focus on other long-term investments. What you go for completely depends on how much money you’ve got and the risk appetite you’ve got. But you should be building a diversified portfolio. That just means that you should have your eggs in a few different baskets and dump all your money into one investment.
In particular, it means investing into different types of investment and risk profiles. Again, your percentage allocations will depend on your own risk appetite, and they’ll probably change over time too. For example, whilst I’m quite young, I’m deploying a large percentage of my capital into buying small businesses. That’s risky though, and it’ll change over time.
What you need to understand here are the ideas that you can go for. I’ll bullet point some, and then give you a couple of resources that will help you.
- Open a stocks and shares ISA and invest in either halal funds or directly into companies. If you want to invest directly into companies but you’re not sure how to make sure they’re halal, it’s worth investing into our course that tells you exactly how to do it properly (don’t rely on automated calculators): https://courses.islamicfinanceguru.com/p/a-jargon-free-walkthrough-on-how-to-make-sure-a-stock-is-halal
- Invest in property either directly yourself or through a hassle-free platform like Yielders.
- Invest in start-ups and make potentially astronomical returns if you catch the next Deliveroo or similar. We do start-up investing ourselves – sign up here if you want to invest alongside us.
There’s loads of potential ideas here but these are three key ones that I like mainly because they offer varying risk. Property is the safest of the three, the stock market is the medium risk, and start-up investing is high risk.
Two resources I’d recommend:
What’s your next step?
It’s all well and good for me to bleat on about a financial plan for 2022, but it means nothing if you don’t act on it.
Tell me in the comments below or direct via email – what is your next step?
Do you disagree with anything? Any further suggestions? Lay it all out, I want to hear from you!