Halal Money Matters

Halal Money Matters Podcast

Episode 36 - Seven Rules for Saving Money

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Monem Salam:
Welcome to Halal Money Matters, sponsored by Saturna Capital. I'm Monem Salam. Today is an interesting one. We have with us Haitham Al-Sayed, who is currently at Saturna Capital working as Vice President of Investment Advisory Services. Graduated with a BA, trying to get into medical school, but decided to change his mind and went into finance. Got his MBA in International Finance and Management from Thunderbird School of Global Management. And today's topic is really interesting because, you know, a lot of times we talk about as financial advisors or people in industry, we talk about, hey, you should really save more and you should save more, and you should save for this and save for that. And when we're talking about that, sometimes we have to take a step back and say, what are the steps in being able to do it? You know, what are some key areas to look at in my finances where I could maybe save a little bit of money and use that money for investment purposes, for whatever goal I have. So with that, I'm really excited to have Haitham Al-Sayed on the call.

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Monem Salam:
So, Haitham, thank you again for joining us on the show. I know we've had you here before, so it's really a pleasure.

Haitham Al-Sayed:
It's good to be back. It's been a while.

Monem Salam:
I'm really excited about this topic today because I think we're kind of breaking it down into, like, seven rules for saving money.

Haitham Al-Sayed:
These are rules of thumb, in my opinion, but, you know, we only have two thumbs. But actually there's more than like you said, there's about seven or 8 or 9. Sometimes people go up to ten. But I think these are very basic things that people should really like, kind of like your cheat sheet that you should look over periodically. Reminders how we should save, what should we be doing from different angles of our sources of income and different angles and sources for savings and investing for the future.

Monem Salam:
And okay, so let's dive right in and talk about these seven habits. The number one, the 50, 30 and 20 budget rule. So tell me a little bit about that.

Haitham Al-Sayed:
Sure. So budget is a key word here because, budget is just like a plan. It's a blueprint. And if there's no blueprint and there's no plan, then you you're not going to, you know, really succeed. So it's really important to have a budget. For a lot of people is a finite number of money coming in, sometimes a finite number going out or more likely that outflow number is infinite. So it's really important to bucket into this 50, 30, 20 rule, which means 50% of your income should be focused on needs, basic needs, housing, food, car insurance. We cannot drive without car insurance, so we have to have it, right? Utilities, transportation. And then the 30% is more on the wants. So you know, entertainment, travel. So that's kind of like your wants and wishes bucket. And then the 20% should be for what we call the emergency fund, paying off debts. I mean, that should be the number one thing is or any that it should be paid off first and then putting some into investments and some into retirement. And we'll talk about some other steps within those retirement buckets, investment buckets.

Monem Salam:
I think generally speaking, there's a lot of budget worksheets, stuff out there. I mean, it's pretty simple from my perspective, right, you have income, which is your money coming in and then your expenses, which is your money going out. Well, I was taught very, very early on the expenses part of it, the first thing you should have as a line item is pay yourself first. Right? And that's really where that 20%, comes from is that if you don't kind of plan for it in advance, after you're done with your needs and your wants, you might not have any leftover for savings. So it's really a matter of, if you had to put it in an order, it would be 20% savings, then 50% needs and then 30% wants. Do you agree?

Haitham Al-Sayed:
Yeah, absolutely. There's a rule of thumb that talks about, you know, having a habitual, automatic, disciplined process in place, which is having, you know, automation. And that's where that 20% paying yourself first.

Monem Salam:
Where would you put charity in this?

Haitham Al-Sayed:
Well, it's an obligatory thing. And we should look at it from a perspective of as a need. So there's a need for the aqeedah also for this dina here. So we need to, you know, do what we can while we are alive to plan for that aqeedah. So the zakat should be a priority in that need bucket as well.

Monem Salam:
I can agree with you. And that the idea is, is that, do you want to do it for zakat, I would think of it as a need, but if you want to do it for sadaqa or for charitable, like volunteer charity, I would put it as savings. Right? But both of those categories come first, right? So part of paying yourself first is also to be able to give back to the community, to the mosque and those type of things. And then zakat obviously is an obligation. And so, you know, a lot of people will talk about the fact that, oh, they wait until the end of the year to calculate their zakat and then maybe realize, oh, I don't have enough money to be able to pay for zakat. So a good rule is to be able to just on a monthly basis, set aside some money, pay it for zakat, and then you can use that at the end of the year to tally if you owe a little bit more or you owe a little bit less on that, that could return to charity.

Haitham Al-Sayed:
Valid points for sure.

Monem Salam:
Yeah. Okay. So let's keep going. And the second one is the 1% rule for impulsive buys. The most that ever happens to me is when I go to Costco. I don't know why, but Costco is a very, very impulsive buy for me, right? You go there, you see, like, don't even need anything. You're like, oh my God, this looks so good.
And I just want it. What does it mean, the 1% rule for impulsive buys?

Haitham Al-Sayed:
Well, you mentioned Costco or you know, Ikea. Like, you know, they put you from one door and you can leave from one door. So you go for a kitchen, but you buy something in bedroom and that's … you don't need it, but you just see something that's either on sale or discount, so you want to just go and buy it.  But going back to the 1% rule of impulse buy. Basically, if an item is over like 1% of your gross income, you should wait three days because most likely is that buy that you want it to do, you really don't need it, so it's not a need, it's more of a want or a wish. And you know, I even tell my children. I say, okay, you know, you want this? You don't have the budget for it. So why don't we wait three days and then you ask him again, like, oh, you know what? Yeah, I don't I don't really need it. I just, you know, it looked cool.

Monem Salam:
Yeah. All of these habits you would want to start very, very early on. So let's supposing you're just graduating from college, you get your first job. Let's sat $80,000. That 1% comes out to $800. So that's kind of giving you an idea, mental math as to what you should be thinking about. But the other thing I would caution, and it comes into this similar thing about impulsive buys, is that you should never think of purchasing as a therapy. Right? It's a high that you get when you buy something, but there's always, just like sugar, there's going to be a crash afterwards as well. And the high doesn't last as long. And so you're always going to want to do that, so...

Haitham Al-Sayed:
And to your point, these days, it's not like our grandfather's days or our days growing up when we didn't have Amazon or everything was just in the click of a button. We used to have cash. And when you go in and you say, oh, that was a big chunk of the cash I was holding is gone now. Now it's like, okay, I don't even touch cash. I don't even put credit cards. You just click a button. And so yeah, that that makes impulse buying even more easier. So you got to be very careful.

Monem Salam:
That's a good point. Ease of use makes it easier for you to be able to spend on things you don't need. Yep. That's true. Number three, the rule of 72.

Haitham Al-Sayed:
The rule of 72 is to quickly calculate how many years it'll take to double your money. I'll give you an example. At 10% return on your portfolio, you know, in a vacuum, will double your money in about seven years.

Monem Salam:
Yeah. So basically you're taking 72 and you're dividing it by your rate of return, which you said was 10%. That gives you 7.2%.

Haitham Al-Sayed:
Correct. If your return was 8%, it'll be nine years. You know, so you know, there are options and investment vehicles out there that, you know, have historically done better than these returns. And people have done their money faster.

Monem Salam:
Yeah, or slower depending on the market environment, and then other things as well. I think it's important to keep that rule in mind. So if you're younger, you know, let's supposing the first say $10,000 you put in. Right. And like you said, let's just take an average number of like 10% a year. Your number is going to double multiple times before you end up retiring. At least 5 or 6 times, which you can double, so…but the other part of it is also is one thing is to rely on the doubling aspect of it, but also the secondary item to this is that in the initial stages, when your portfolios are small and you're trying to invest the  money, the return will always be more with the money that you put in, rather than what the actual growth of the portfolio. Does that make sense?

Haitham Al-Sayed:
Yeah, and I think what you're trying to also imply is that this compounding growth over growth, because if you put, you know, 10,000 it returns, you know, a 10%, you know, you have $1,000, so you're not starting at 10,000, you're starting at, you know, 11,000 this year, and then you get another 10% on that. It's one, you know, $1,100 next year.

Monem Salam:
So 10% return on 12,000 is $1,200, but it's only 1,000 per month. My contribution is always going to be more than the return. But there's a certain point when that switches over, right? And then your rate of return probably will be more than your rate of contribution, and you want to try to get there as quickly as possible.

Haitham Al-Sayed:
Einstein mentioned the most powerful formula in the universe is the power of compounding.

Monem Salam:
Um-hum, um-hum. Number four is going to be 401(k) match rule.

Haitham Al-Sayed:
If your company offers it, the basic rule is at least do that match. I'd like to spend a little bit of time here because, you know, I had a mentor when I started my career who I can, you know, forever be indebted to because they told me start early and maximize your 401(k) contribution. And obviously I wasn't married at the time, so I was doing maximum. I got married, I took that in half, I had kids, I took that in half. But because I put so much upfront in the beginning, I didn't expect, oh, I'm going to have, you know, $10,000 the first year or something. I contributed maybe six. And the rest of it was growth. And then, like you said, the compounding and then I quickly hit six figures, and then I was like, okay, I know I didn't put that much all this time and it's all combination of that compounding growth. So going back to the match, maximize it. There are options for those that, you know, are concerned about I don't have, my company does have halal options. Give us a call. We can talk about it. There are some options that might be out there that you could benefit from.

Monem Salam:
All right, let's keep going. Number five is going to be the three times emergency fund rule.

Haitham Al-Sayed:
This is also a rule that's kind of fluid. You hear about, you know, having three months, six months, a year of emergency funds available for a rainy day. When I do financial plans for clients, I usually tell them six months to 12 months. But then for some people, that number could be really large, right? And so if that number is greater than 25, 50,000, does that really all need to be sitting in cash? There might be some other alternatives we could discuss. But the main thing is to think about, okay, if myself or myself and my wife lose a job, we need to feed the kids, house, everything. We have enough somewhere that we can liquidate. It's not in real estate, it's not in a private fund or anything. It's just access. So that's very important.

Monem Salam:
Two things that I thought about. Number one is I would think that, you know, if your job is very stable, Alhamdulillah, and you don't have any worries, you can maybe lower that amount the three months level, three, four, five months level, and if there's a recession coming down the road, your company is doing layoffs and those type of things, you should quickly try to elevate that number into maybe six months, nine months, maybe even longer, depending on what the environment is. So that's the first part of it. But also is that number, the three to six months, is that based on your income that you would need to have saved, or is it based on your expenses?

Haitham Al-Sayed:
Well, it's a good question you ask because if you do your budget, your expenses should not go over your income, obviously, right? Because then you're doing something that we shouldn't be doing is taking out loans or put on credit cards or whatever. So it's important to make sure there's more inflows than  outflows and how you control that is when you do the budget is that, okay, we're spending this much in entertainment or eating out…I mean, just the other day I took my daughter and we both had a meal and it was not anything sit-down. It was $30, just for two of us. Do we need to do that next time? No. Next time,  I'm going to think twice about having a quick meal for 30 bucks, I mean, I…

Monem Salam:
I mean, I like to think about it as that means going back to the first rule, which was the idea of the needs, the wants and the savings, is that what I would say is most likely if you lose your job and it's an all of a sudden kind of thing, you are not going to be spending it on the wants.  It might be a roll up your sleeves, tighten your belt, just hunker down for a couple of months until you find another job. So, okay, so let's keep going. And the next one that we have is going to be the rule of automation.

Haitham Al-Sayed:
That is basically building a disciplined, habitual behavior. You need to save and invest the money before you even see it. And by creating this automatic system, it shouldn't affect you, like you don't even feel it. Going back to the 401(k) match, if they match 100% up to 6%, for example, why don't you put ten? And if you put ten and for two paychecks you're like, hmm, yeah, it's less paycheck, but I'm okay. I'm still doing fine. That 4% extra compounding over time, that's such a more benefit. And this is where you also say, hmm, you know, I put these little $100 monthly things for the education savings account for the kids. And, you know, they're automatic. And all of a sudden, like, you know, you don't even look at it. And then like, five years later, like, well, Alhamdulillah, this supports half of their tuition.

Monem Salam:
The second part of this rule of automation is the earlier that you do it, the better off you're going to be. So start the habits earlier. So there's two things that I tell people usually. Number one, look at your income not making x amount but x minus whatever savings you have so that you don't you're not even thinking about your savings as being part of your income. Right? So that's one thing. The second thing is any kind of bonus or extra payments that you get, don't even think that you got it. Just put it away. Right? If you really, really, you know, wanting to do something, 50/50, right? Take 50% of your bonus, invest it, 50%, spend it on something nice, you know, take your wife out, whatever it is that you want to do. And that's really important because, again, it's extra money that you're getting, the extra money you could save rather than a short term fix that you'll have where you spend it and then six months later, you're not even using it. Alright,  the last one, that we have on the seven rules is going to be item in, item out rule.

Haitham Al-Sayed:
So what this means is that if you do purchase something, donate, toss, or sell it, another item.

Monem Salam:
Hmm.

Haitham Al-Sayed:
You know, have that balance, have equilibrium. I also learned this from my brother who was an architect, and he's very, you know, into the modern minimalist things. And he says if you haven't used it in the last six months, you're not going to use it in the next six years.

Monem Salam:
Yeah.

Haitham Al-Sayed:
You have to have discipline. Prophet, alayhi s-salam, lived that way to be minimal. Taught us to be balanced. And I think this falls into that sunnah as well.

Monem Salam:
Anything else? Any other rules that you can think of? I know we talked about seven. We want to keep to seven.

Haitham Al-Sayed:
But just one more I'd like to add is a rule of 25, times your annual expenses is how much you need to retire. So if your annual expenses are 60,000, there's a rule out there that says, you know, you need 25 times that. So 1.5 to last you.

Monem Salam:
Are you saying basically, if your expenses are 100,000 a year, you multiply them by 25. It comes to 2.5 million. So you need $2.5 million in your savings or investments to retire. Does that then die broke strategy, or is that, so there's two different ways. One is you can save enough money in retirement that you die broke, meaning by the time you pass away, you have nothing left and you're not going to give anything away to anybody. The second way to do it is you plan so that you include inflation and zakat and taxes and everything in there, so that once you pass away, you are leaving a significant chunk to your heirs, to charity…

Haitham Al-Sayed:
And that's what a financial planner can help you with. So there's three doors that you can pass through your money when you pass away. The first one is children and grandchildren. The second is charity and the third one is taxes or IRS. So you can choose which two doors that you want your money to go through. That's where you know, working with a financial planner or advisor comes in very handy because we could project these things. We can, you know, look at the entire portfolio. We can do a stress test on the portfolio. We'll do the what if scenarios, you know, can I retire at 60 or 65 and spend 150 and to, you know, outlast us.

Monem Salam:
In your example that you gave about the 25 times, is that for the die broke strategy or is that for the…  

Haitham Al-Sayed:
Yeah.

Monem Salam:
That's for the die broke strategy, which, you know, very difficult to do. I mean, if I knew exactly when I was going to die, I could do it. But I… that's really difficult to be able to go for that strategy, it's like…

Haitham Al-Sayed:
Or in retirement, you're like, okay, you know what? I'm done with all this. I haven't traveled, so I'm going to go, you know, first class versus economy. And now that falls way faster than what you expected, you know what I mean?

Monem Salam:
That's true. And that's definitely a want or a desire rather than a need. Okay. Anything else?

Haitham Al-Sayed:
Um, you know, always keep the faith in Allah and the din in front of you, as always, because everything we have to do and we do these things, should be ethical. And that's probably the rule I try to impose myself and teach my kids is you know, start with that. The din and, you know, follow the traits of alayhi s-salam and then use these guidelines. Right? They're not set in stone. They're nothing is guaranteed. And don't be discouraged. We have road bumps, that happens. And sometimes it throws us off.

Monem Salam:
Probably maybe 20 or 30 years ago it probably wasn't viable to be able to make sure that all of the money that you had was halal. Whether you're earning it, you're spending it, you're investing it, that type of thing. But I think now, you know, you can have your bank account being halal. You can have your home being halal, your investments being halal and there's no extra cost to it. It's usually very competitive to anything out there. So one of my rules make sure that everything that you have is halal (laughs). So, well thank you very much, Haitham. This is really good. I know everybody's talking about, you know, the five rules for this and the ten rules for that. So I want to make sure that we got to talk about, you know, the seven rules of how you actually end up saving money. So thank you for your time and I appreciate it.

Haitham Al-Sayed:
A pleasure.

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Monem Salam:
Thank you for listening to Halal Money Matters. If you like what you hear, please do rate us on the app stores and also leave us a review. It helps other people find us a lot easier.

Disclosures read by narrator:
The thoughts and opinions expressed on Halal Money Matters do not necessarily reflect the views of Saturna Capital, Amana Mutual Funds, or their affiliates. This podcast is prepared based on information Saturna Capital deems reliable; however, Saturna Capital does not warrant the accuracy or completeness of the information. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. Investors should consult with a financial adviser prior to making an investment decision. The views and information discussed in this commentary are at a specific point in time, are subject to change, and may not reflect the views of the firm as a whole. All material presented in this publication, unless specifically indicated otherwise, is under copyright to Saturna. No part of this publication may be altered in any way, copied, or distributed without the prior express written permission of Saturna Capital.