Planning your finances – budgeting, saving, investing – IslamicFinanceGuru

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.

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.

There’s a great summary of the book here and you can buy the book here.

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:

1. 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.
2. 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.
3. 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:

1. 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)
2. 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:

1. 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.
2. 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, 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.
3. 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):

1. Low risk: this is where you put in Cur8 Cash. 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.
2. Medium risk: invest in a sukuk fund (via Wahed or Cur8 Capital). 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.
3. 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. We already offer certain fixed-income investments that are part of our innovative finance ISA offering on Cur8 Capital, which gives double-digit returns. Specifically focussed around finance businesses, we have a USD income fund that recently launched and is expected to return profits of around 8.5% per annum.