I apologize, it’s been a while since I posted. I have been caught up with work but I wanted to dive into investing with Robo Investors and would like to look at good one being offered here in Canada; WealthSimple. Robo Investing is an investment strategy where you can invest automatically in a pre-packaged equity portfolio in easy way. You can transfer a lump sum or have it automatically pull a set amount from your savings account every month. This makes investing easy, but it is important to know how a robo investor is investing that money.
WealthSimple’s Halal Fund
WealthSimple’s Halal fund can be found here. Their fund holds 50 companies (equity) with a passive investment strategy and a recommended cash position to reduce risk. This portfolio does not hold interest bearing vehicles such a GICs and Bonds as they are prohibited. Let’s take a look at what is in the portfolio to ensure that it meets Islamic investing principles.
This is some of the companies in their current Halal portfolio:
Alibaba Group Holding Ltd. – Products / Manufacturing
Danaher Corp. – Science and Technology
Canadian National Railway Co. – Transportation
BP plc – Energy
and many more……..
As you can see, there is a diversified portfolio of publicly traded companies across industries such as energy, products / manufacturing and pharmaceuticals among others.
The key here being is that all investments are in industries that do not deal primarily in interest, sin stocks (marijuana, alcohol, pornography, gambling), pork, weapons manufacturing or other prohibited activities. It’s also important to note that these companies should not profit off of or have excessive debt (33% of debt less than total assets) to be shariah compliant.
WealthSimple’s Investing Fees
WealthSimple states that their fees are structured in the following way:
We charge the same fees as for our halal portfolio as we do for our regular and socially responsible portfolios: nothing on the first $5,000 for a year, 0.5% up to $100,000, and 0.4% over $100,000. Plus, you get an additional $10,000 managed free for every friend you refer to Wealthsimple!
This means that if you are investing $200,000 your fees would be:
Annual fees on returns for first $100,000 (0.5%) = $500
Annual fees on returns for next $100,000 (0.4%) = $400
Total fees are $900 on the $200,000 investment taken from any profits gained for the year.
For robo investing, a 0.5% fee is typical of other low-fee investors in the market. Robo investors are always looking for more customers, so they offer incentives to refer friends/family to invest.
Robo investing is a great way to get into shariah-compliant investments, and depending on the country you live in there are different options; so do some searching to see what is available and what their fees look like.
I hope this post on robo investors was interesting and insightful! As usual, I would love to here any comments, feedback or suggestions on new topics on the Muslim Financial Independence Blog or on my twitter @muslimfinancial. See you all soon!
AuthorComments Off on Using Open Banking Tools to Manage your Finances
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As-Salaam Alaykum dear readers,
In this post, I wanted to write about using open banking tools such as Mint, Curve and Dave to manage your budgets and various credit cards in one location to get a handle on your finances. These open banking tools connect to your bank accounts to pull in your transactions and provide you data on how your spending your money. You are able to use these tools on desktops and smartphones through their respective applications.
What are the benefits of using these tools?
I will breakdown some of the benefits these platforms offer people looking to understand their cash flow and trends while looking at your financing.
Aggregate your Finances into one Place
These tools allow you to pull in all of your bank accounts, credit card balances and investments into one view to help you understand your Net Worth. Net Worth refers to an individual’s net economic position which is the value of the individual’s assets minus liabilities.
Examples of assets that an individual would factor into their net worth include:
Bank balances (chequing and savings)
Retirement accounts
Investment accounts
Home worth and owned vehicles
Examples of liabilities that need to be looked in regards to net worth are:
Credit card debt
Secured debt (such as a home mortgage)
Personal loans (such as car loans or lines of credit)
Student loans
Budgeting and Trends about your Money
You can also begin to see your spending history over time and report on how your income is being used in a given period of time. These tools also allow you to create a budget, so you can see if your overspending based on things like:
Categorization of spending such as (rent, entertainment and loans)
Upcoming payments that come out automatically (eg. mobile phone bills and monthly memberships)
Targets and thresholds you’ve set to alert you if you are overspending on your budget
Graphs and analytics showing your spending / income over time to help you plan or reduce spending
Automated Savings, Virtual Cards and Overdraft Protection
These innovative platforms also provide functionality that traditional banks don’t offer their clients. Once signed up, users are able to leverage features (to name a few) such as:
Automated savings that looks at your income / spending to put cash away for emergencies
Consolidation of multiple accounts and credit cards to a single card; allowing users to simplify their banking
Cash back on purchases with specific retailers
Overdraft protection for those who frequently have a negative balance in their bank accounts
Access to prefered foreign exchange rates and travel insurance for people travelling to different countries
Clients looking to use open banking platforms should stick to one, as it’s meant to simplify and consolidate your personal finances. These tools can help people get a handle on their debt, income and cash flow which will help them on their path to financial independence.
I hope this post on open banking was interesting and insightful! As usual, I would love to here any comments, feedback or suggestions on new topics on the Muslim Financial Independence Blog or on my twitter @muslimfinancial. See you all soon!
AuthorComments Off on Understanding Credit Cards and Why they Keep you Poor
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As-Salaam Alaykum dear readers,
I wanted to write up something explaining how credit cards work and how they are created to keep you poor. The majority of people living in the west have them, and sometimes they are a necessary evil to be able to buy the goods that we use on a daily basis. Some would argue that cash can still be used in most places, but we are increasingly seeing the removal of cashiers, tills and dispensement of cash; opting to go with technologies such as debit/credit and tap (contactless payment) to purchase.
From a wealth-building perspective, credit cards offer a quick channel to funds; but the compounding interest can be devastating for people unable to pay on time. In America, the average credit card debt per borrower has been rising in recent years to $5,554 in the first quarter of 2019. The same report shows that 37% of Americans have revolving credit card debt from month-to-month. Things aren’t any better in Canada, with the average Canadian owing $8,500 in consumer debt. In the UK, total credit card debt was £72.6 billion in February of 2019, with the average credit card debt at £2,649per household. With revolving credit debt, it’s a big detractor in keeping you poor and delays your financial independence.
How do I understand credit card rates?
Most people have credit cards, so we need to explore how exactly they work and what makes up your credit card terms that you agree to when when taking a card from a bank / provider. With most cards, a bank works with a specific issuer (VISA / Master Card etc.) to bring a branded product for the traditional banking customer. Typical these cards have some major elements to them:
A credit limit – credit limits vary greatly depending on your income, credit score, and existing debt. There is great variability in how a bank approves you for a credit card, with some banks offering you a subprime card (higher interest rates) based on the risk of an individual defaulting on their payments. Some of these factors are:
Your credit score
Your monthly income (self-reported)
Your monthly rent or mortgage payment (self-reported)
Your existing credit lines and balances
Your employment history
Your address history (how long you’ve lived at your address)
The interest rate – This is structured in what they call the APR (Annual Percentage Rate). This is the annual rate charged per year as a percentage to the borrower. Most cards are on a variable APR which takes the current prime interest rate and add the banks margin on top to get a percentage.
Let’s take a look at an example
Here is an example of an everyday spending credit card from a major bank in the UK – HSBC.
As you can see there are some important pieces of information about this card:
The “assumed” credit limit – This would represent an average credit limit that the bank would look to issue cards at for its customers for this specific product. This credit limit (£1,200) drives the types of interest rates you might see. If your approved credit limit is higher or lower, you might have different interest rates offered by the bank.
The interest rate – This is 22.9% APR variable which means that the rate might float higher or lower based on the prime interest rate in the UK.
They are offering 0% interest for the first 18 months of using the card, but also charge a 2.9% fee if you choose to consolidate other debt or credit cards to this one in the first 2 months.
No annual fees for the card.
There is a minimum monthly repayment of 1% of the principle or 2.5% of the balance at the end of the month.
So what’s the big deal? The interest is not that high, right?
Aside from it being forbidden to muslims to both lend and borrow at interest, we can flush out some examples over time to see how much interest compounds if you don’t pay off your card.
Example after the “interest free” period of 18 months:
£3,000 credit balance on a 22.9% interest rate cardwith minimum monthly payments of 2.5 %
Credit Balance: £3,000
Interest Rate: 22.9%
Minimum Repayment Amount: Starting at a £75 and going down as you pay the card off
Over the course of 35 YEARS to the pay card off at the minimum payment amount, you are looking at £3,000 principle + £6,473 of interest for a total of £9,473 to be paid back. That means that you are paying back 315% of your borrowed amount on minimum payments. That folks, is how interest makes your poor! It only gets worse if you have higher credit limits and higher balances.
I have lots of cards and lots of debt, what do I do?
There are some ways for your to get “out of the hole“, and out of debt faster if you have run up your credit cards and are not making progress against the interest you are paying:
Switch to a fixed payment schedule – If you are able, try and dedicate a fixed amount to the outstanding balance of your cards. By maintaining a regular amount, you can significantly reduce your interest.
Pay off your highest interest rate cards first – If you have multiple cards, try and pay off the highest cards first, as the longer they run with balances they more you will pay in the long term.
Call your credit card company and negotiate – Call your credit card company and try to negotiate the interest rate down if you can. Some banks will allow you to do this if there you are friendly or if you are truly heading towards to bankruptcy.
Freeze your cards and reduce expenses – Freezing your cards with the bank will force you to not use them, so you can focus on paying them off. Also, looking for ways to reduce expenses to put more towards your payments is important.
Consolidate your cards to a bigger, lower interest loan – There are many services out there where you can consolidate into a loan or line-of-credit and pay off all of your credit cards avoiding the high interest rates. Loans typically have much lower interest rates than credit cards.
Carrying debt can be very stressful to you and your family, so the best advice is to avoid using cards and buying things that you really cannot afford. We as humans make mistakes; but working on rectifying them is critical.
As the Prophet (SAWS) said: In SahihMuslim – (1598) narrated that Jaabir said: The Messenger of Allah (blessings and peace of Allah be upon him) cursed the one who consumes riba and the one who pays it, the one who writes it down and the two who witness it, and he said: they are all the same.
We don’t want to forsake the blessing that we receive or recieve Allah’s (SWT) curse upon us; so the best option is to avoid interest or work quickly to get out of of it as soon as possible.
I hope this post on credit card debt was interesting and insightful. As usual, I would love to here any comments, feedbacks or suggestions on new topics on the Muslim Financial Independence Blog or on my twitter @muslimfinancial. See you all soon!
Today, I would like to introduce the basics of budgeting as a critical skill in improving your personal financial management. It is important to understand what exactly a budget is, and how it helps you understand what you earn and how you are spending that income. A budget is a plan that looks at Income and Expenses and helps you understand how you much you make and spend over a specific period of time. We are going to begin by examining the elements of a budget to help us get a monthly / annual view on on our spending.
Elements of a Budget
Fixed Expenses: These are expenses that stay the same from month-to-month and typically include things such as:
Your rent or mortgage payment
Any student loans, car loans or equivalent debt on lines of credit
Any of your monthly, recurring entertainment expenses (think Netflix, Spotify, mobile phone contract, gym membership, car insurance, house insurance etc.)
Variable Expenses: Expenses that change from month-to-month, such as:
Electricity / water and utility payments
Food and groceries
Petrol / gas for your vehicle
Restaurants and eating out
Ad-hoc entertainment expenses such as cinema and events
Both of these add up to your Total Expenses, which represent all of the money you are spending on a monthly basis which should give you an average number across 12 months.
Total Monthly Income: This represents all of the income that you make in a month including:
Salary from your job
Side-hustle and cash jobs
Investment dividends
Pensions
Government assistance and social security pensions
Rental income on your properties
Anything else that generates money for your every month
It’s quite easy to see that we need to insure that your Total Monthly Income > (is greater than) your Total Expenses (which is your Fixed Expenses + Variable Expenses). Whatever is left is considered your Disposable Income, which can be used for investments, savings and emergency funds and also provide the basis of establishing a great savings rate.
Building a Monthly Budget Worksheet
Here is an example of a monthly budget worksheet with example values to help you get started on getting your financial information down on paper. Don’t forget to utilize tools like your banking app or Mint to help you easily understand what you’re actually spending.
In my example, Adam is a business professional that lives in London, UK. He is in his mid-30’s, owns his own vehicle but rents a 540 Sq Ft furnished flat on the outskirts of the city. He started investing early in his career and is now receiving some healthy dividend income.
Gross Income Worksheet (before Taxes) Monthly Amount (£)
Wages, Salary and Bonuses
2700
Investment Income / Dividends
340
Rental Income
0
Other Income (Pensions, Government Aid, etc.)
0
Total:
3040
Taxes Withheld and Deductions Monthly Amount (£)
Income Tax
387
National Insurance
278
Pension Contributions
61
Total:
726
This leaves Adam with a Net (Take home pay) wage of £3040 – 726 = £2314 / month.
Now lets begin to take a look at some of the expenses Adam has:
Fixed ExpensesMonthly Amount (£)
Rent
1300
Car Insurance
39
Internet
24
Student Loans
0
Car Loans
0
Gym Membership
10
Netflix, Spotify, Apple etc.
25
Total Fixed Expenses:
1398
Variable Expenses Monthly Amount (£)
Utilities
146
Groceries
270
Petrol/Gas
140
Restaurants
120
General Entertainment
80
Total Variable Expenses:
756
Based on our budgeting example, Adam has Total Expenses (Fixed + Variable) of:£2154 / month.
Looking at our Net take home pay minus our Expenses: £2314– £2154 = £ 160 / month left over as Disposable Income for savings, emergency funds and additional investments. Adam should probably focus on reducing his expenses by finding a LCOL(lower cost of living) area if possible to try to reduce his expenses.
Budgeting Tips
Avoid car loans as much as possible. If you are not making enough money to pay for something like a car, taking a loan will only make it worse for you.
Reduce your entertainment expenses. Almost every streaming service, app or entertainment package has a recurring monthly charge. Take an honest look at how much you are using these services and see if there are free alternatives.
Vacations from a dedicated vacation fund, not from debt. It helps to setup a vacation fund and slowly add to it every month. Don’t put your vacation on high-interest credit cards or lines of credit.
If you have credit card debt, consolidate to lower interest rates and pay more than the monthly minimum. A major issue when it comes to debt is thinking that things will be okay by paying the minimum on the credit card. Those interest payments add up and will cost you a lot over time. Think about consolidating to lower interest line-of-credit if you can.
Cut back on expensive nights out-on-the-town. Reduce how much you go out, and find cheaper places to reduce your expenses. Many people spend much more than they should eating out and on entertainment which can really cut into your disposable income.
Limit your spending on expensive clothes, shoes, purses and accessories. Lifestyle creep and keeping up with others is a fast way to become working “poor”. Does it really matter if you have another Armani shirt or Coach bag?
I hope this post on budgeting basics was interesting and insightful. I will definitely come back in the future to break down this topic in greater detail. As usual, I would love to here any comments, feedbacks or suggestions on new topics on the Muslim Financial Independence Blog or on my twitter @muslimfinancial. See you all soon!
AuthorComments Off on Islamic Finance – Introduction to Ijara (Leasing)
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As-Salaam Alaykum dear readers,
I would like to introduce another concept in Islamic Finance called Ijara, which refers to the Islamic version of leasing. Leasing is increasingly used as a vehicle to provide individuals and business the ability to both “rent” things as well as a “rent-to-own” model. For those unfamiliar with “rent-to-own”, it’s a contract that allows the renter to pay for the usage of something (i.e. a car or house), while also paying down a percentage of the principal so that at the end of the contract the renter now owns what they were renting.
Breaking down the Ijara Model
There are typically 3 parties involved in an Ijara (lease) contract:
The Customer
The Bank providing financing
The owner / dealer of the asset being leased
This makes sense as banks want to stay in the financing business, they don’t necessarily want to manage assets outside of their core business. Once the customer agrees on entering the contract with a bank, the bank is then responsible for completing the purchase of that asset to lease out to the customer. Remember, in Islamic Finance the Lessor has to own the asset to lease it to you, the customer.
The Lessor is responsible for all major costs of the asset (such as insurance), but operational costs land on the Lessee (you, the customer). Typically, at the end of an Ijara contract from a bank, they will have released the asset fully to you as a customer as you know own it. Ijara is used in many situations where you would use car / home financing interest-based loans.
Let’s take a look at what a real-world car Ijara contract could look like from an Islamic Bank; Bank Alfalah. Some interesting up-front features and benefits of Ijara with the bank.
If you remember earlier, we stated that the Bank is responsible for buying the asset to lease to you. They naturally have relationships with manufacturers / dealers in the country to provide you a selection of vehicles that be leased. Some things to note:
Looks very similar to traditional leasing terms, which means that the product the bank is offering is flexible as an alternative to interest-based leasing
Some initial security deposit is required that goes to the capital amount of the vehicle that you “own”, which means you own 15% of the vehicle in above example and the bank is renting you the other 85%
There is an interesting and handy calculator provided, so l would like to run some numbers through on a real car. I picked a brand-new Honda Civic VTEC from the options in the calculator, with 15% deposit and a 7-year Ijara term. Values are in Pakistani Rupees, so I will translate them to CAD dollars as we go along.
Interesting thing to note, there is a minimum salary requirement to be eligible for this loan. PKR 50,000 is CAD $412.67 / month salary! I am really interested in looking at their Bank Schedule of Charges; let’s take a peak.
There are some additional fees and penalties within the particulars of the contract:
CAD $66 dollar (PKR 8000) registration fee, CAD $41 (PKR 5000) income estimation charges, and other fees for registration / plate delivery, document retrieval and verification charges
A 5% termination fee if you want to break the lease
A charity amount on late payment, as it is impermissible for the Bank to charge you interest. They stipulate a 24% Per Annum amount on whatever was outstanding on the late payment. Seems similar to the types of percentages you would see for late payment on interest-based leases
Other charges for repossession of vehicle, I am guessing from the customer breaking the Ijara early
I hope this provided a practical example of what a real-world Ijara contract looks like.
Cool, but are there any banks who provide this in North America?
Looks like there are a couple of banks / corporations that can provide Ijara products (and others) in Canada and the US:
There are many other smaller financial houses and cooperatives that offer Islamic products in North America, and in my opinion it will only be a matter of time until bigger/global players capitalize on this market in the future.
AuthorComments Off on Islamic Finance – Introduction to Mudharabah (Investment Contracts)
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As-Salaam Alaykum dear readers,
Today I wanted to walk through an introduction to the topic of Mudharabah (Investments) in Islamic finance. As I write on this blog, I will continue to explore and introduce topics for personal finance / financial independence as well as Islamic finance. There are various shariah based financial contracts, and I believe it’s beneficial for both Muslims and non-Muslims to understand alternative, (re)emerging financial vehicles that promote ethical and non-predatory market behaviors.
Mudharabah (Investment Contract)
Let’s explore how a basic Mudharabah investment contract is constructed.
In its basic form, there are generally 2 parties:
The Rab Al Maal or the “Investor”
The Mudarib or the “Investment Manager”
The investor enters an an agreement with an investment manager to manage his capital and agree to return their capital with a return (if successful) after a given time period. The key here being is that there is no “certainty” that there will be a net-positive return during the investment venture. This means that practically any “loss” in the venture in terms of money is borne by the Rab Al Maal (Investor), while loss of time and resource effort is born by the Mudarib (Investment Manager).
This financial vehicle is mostly used by the Islamic banks for deposit accounts.
So how does the work in current market conditions with Islamic investments? This financial vehicle is mostly used by the Islamic banks for (savings) deposit accounts. There is typically a published Expected Profit Rate (EPR) for depositing your money with the bank; which is quite comparable to the types of returns you could get at a conventional interest-based bank. Let’s take a look at a deposit account being offered at Noor Bank.
A Mudarabah investment deposit at Noor bank shows the following:
This shows an initial deposit value in UAE Dirhams, and the EPR (Expected Profit Rate) that you could potentially receive based on the tenor (or time the funds are locked into the investment). As you can see, the more you put into savings and the longer it’s in, the greater the EPR would be from the bank.
Now let’s take a look at the agreed upon percentages of the contract:
The contract states that the Rab Al-Maal (Investor) will receive 10% and the Mudarib (Investment Manager ie. the bank) will receive 90% of the profit based on their investments.
There are many emerging savings programs at Islamic banks that accept both local and international currency across the world, especially in Malaysia, Indonesia and the Arab Gulf countries among others.
I will continue to explore additional Islamic Finance topics and practical applications in this blog, so stay tuned! I hope you enjoyed this introduction to Mudarabah, and please feel free to follow me on Twitter as well as this site, the Muslim Financial Independence Blog.
Please feel free to leave any comments or questions for future topics. I would love to hear from you!
AuthorComments Off on Investing – The 25x and 4% Rules
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As-Salaam Alaykum dear readers,
Continuing on with our discussion about the principles of financial independence, I wanted to look at some investment strategies to get us on the path. Today, I wanted to explore two critical topics in financial planning and investing called the 25x rule and the 4% rule. If you need a refresher on the theory of financial independence, check out the basics (here) and savings rates (here).
So what exactly are these rules and how to they apply to becoming financially independent?
The 25x Rule
The 25x rule (multiply by 25 rule) estimates how much money you will need in your retirement by multiplying your desired annual income by 25. Here is the key, for this to really make sense, you need to look at this in terms of your annual expenses as well as inflation to get an accurate number. This aligns to the rule below in terms of what you can expect as returns when investing in the market indexes or diversified, large-company stocks.
If you remember my post on the basics, financial independence is not only about investing, but about reducing and eliminating the amount of debt you hold. For Muslims, eliminating all forms of bad debt carrying Riba (interest) as quickly as possible is a requirement. So when thinking about your expenses, you need to working on eliminating all of the various types of loans that you might have that is drawing monthly payments out of you. I believe that you need to eliminate the worst loans first (those with the highest interest) which are typically:
Credit Cards
Car loans
Mortgages
Lines of Credit
Other Loans
The 4% Rule
The 4% rule refers to your withdrawal rate that can be safely taken out every year based on the investments you hold. The Trinity Study states that over the long term, the broader market index (large company stocks) will return 4% or better ever year. That means that if you take out 4% a year, there is a very high probability that you will not need to touch your base investments.
Now, I want to caution you that the 4% rule is really a guideline, because as we know there are no guarantees when it comes to economic uncertainty, global market crashes etc. This is just a tool for you to use to help guide what types of savings numbers you should be looking for to become financially independent.
Putting it all Together
So lets take a look at an example with some numbers:
Hiba works full-time and is divorced with no dependents and no large-loan debt in her mid-30’s. She is saving money every year, and is continually adding to her RRSP’s.
Age: 36
Existing RRSP’s: $83,000
Net Income (after tax): $67,000 / year
Expenses: $49,000 / year (All expenses including gas, insurance, bills, rent, utilities, phones, food, entertainment etc.)
Savings Rate: $67,000 (Net Income) – $49,000 (Expenses) = $18,000 / year for a 27% savings rate
She believes that she will be able to live on $50,000 / year in expenses. Based on her current savings rate (27%) and the 4% rule withdrawal rate, she will be able to retire when she is 61 and would need $1,337,500 in investments to pull out $50,000 / year without touching them. If she earns more money or reduces her expenses this should increase her savings rate; which will allow her to get to retirement faster.
I hope this information was helpful as this really is the base of financial independence. Remember, it’s about reducing debt, increasing your savings and investing them in the market while not increasing your lifestyle expenses as times goes on. What are your thoughts on this idea?
Please feel free to leave any comments or questions! I would love to hear from you!
AuthorComments Off on Principles of Islamic Rulings
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As-Saalam Alaykum dear readers,
Today, I wanted to explore the fundamental principles of Islamic rulings which will underpin future discussions about Islamic Finance.
Note: Obligatory warning – I am not a scholar, so if I make any mistakes in my understanding please feel free to comment with authentic sources and I will endeavor to correct them wherever possible.
In the west, we are taught almost nothing in school about general finance, let alone alternative financial systems such as Islamic Finance. As Muslims, it is important to understand how the Shariah (Islamic law / legal system) in Islam is understood and applied in all aspects of our lives. We are required to think about how we earn, transact and invest our wealth in a Halal (permissible) way; which can be difficult to do living in the west. We will try our best to lay out the foundations of Islamic rulings in this post as a basis for future discussions on Islamic financial vehicles and investments.
Sources of Islamic Law
When it comes to understanding how rulings are made within Islamic law, Muslims look at the following sources (in order) to determine how to proceed. Muslims always start with the most authentic sources, then look to expand understanding with additional sources if clarification is needed.
These sources in order of authenticity are:
The Quran – The Muslim Holy Book
The Sunnah – The authentic, recorded observations and interactions of the Prophet Muhammad’s life
Ijma – Consensus of scholars on a specific topic
Qiyas – Using analogy to derive a ruling
I will explain in some detail the above 4 sources so that readers can get an brief understanding of how we look at these sources; as they will makeup the basis for the rulings relating to Islamic Finance. I will also touch briefly on Islamic commercial law in this introduction.
The Quran
To Muslims, the Quran is the most sacred text in our traditions. We believe that the Quran is the 100%, defacto word of Allah (God in Arabic) revealed to the prophet Muhammad ( صلى الله عليه وسلم) over the course of its 23 year revelation. The Quran is seen as infallible and contains guidance, support, explanations, commands and warnings for Muslims that deal with all aspects of life. The Quran, with support of the Sunnah deals with all aspects of Shariah (Islamic Law) including our legal system and code of conduct in our dealings across individual, political, community and business domains.
The Sunnah
The Sunnah comprises a specific corpus of texts that narrate how the prophet Muhammad ( صلى الله عليه وسلم) lived including his actions, sayings, explanations of Islamic principles as well as his dealings with internal Muslim community and the external political environment of his time. The Sunnah also has an order of authenticity and gradings that we will briefly explore. In this blog, I want to stress that we only want to focus as much as possible on the authentic sources in Islam. These sources are:
The 2 most authentic collections – Sahih Bukhari and Sahih Muslim, especially those narrations are found in both books. Sahih means “authentic“, and refers to the reliability of the transmission and who transmitted it.
Other Sahih books – Sunan Abu Dawud, Sunan Al-Tirmidhi, Sunan Al-Nasa’i, Sunan Ibn-Majah, with a focus on Sahih Hadith (narrations) in these collections. I don’t want to spend time talking about the science of Hadith, chains of narration and transmission – but it is extensive – and really a science. If there is interest I can link sources in the future for more in-depth discussions.
Ijma (Consensus)
Ijma refers to an agreed upon consensus of Muslim scholars around a given topic. We resort to consensus when there isn’t a clear direction of opinion on a specific topic found in the Quran and Sunnah. This consensus is not equivalent to a law written in stone; different groups of scholars have different opinions based on the time-in-history, place, people and circumstances affecting their given communities. The Islamic tradition is rich in divergent thought around every Islamic topic imaginable, but our goal is try and follow the general mainstream opinion and ruling wherever possible.
One point that I want to note; it is not allowed in Islam to go “Fatwa shopping”, which is essentially looking for one-off rulings or permission from scholars to support a point of view that you desire because you know it probably doesn’t cut it in regards to a legitimate mainstream opinion. This is important in Islamic Finance as we want to ensure that we are following the mainstream opinion of scholars who are actually trained in Islamic Finance.
Qiyas (Analogy)
Qiyas refers to a legal tool whereby we use analogy to something already understood to derive a ruling on a particular topic. Qiyas is considered a secondary source in application to Shariah, and many scholars throughout history have had both anti-Qiyas and pro-Qiyas points-of-view. An example of Qiyas would be: “the Quran forbids the sale and purchase of goods at the time of Friday prayer (specifically after the last call for prayer). By Qiyas, this prohibition is generalized and extended to all kinds of transactions since the same underlying cause (abandonment of prayer) applies to more than one case (not just buying and selling of goods)”. So this is really all about using an existing rule to derive a new rule. Qiyas cannot be used as an infinite chain to keep deriving rulings based on more and more generic analogies; there are clear guidelines (which I won’t get into here) that govern how and when Qiyas can be used, if at all.
Islamic Commercial Law
Islamic commercial law follows a general principle in Islam for all rulings that do not impact the core beliefs and teachings of a Muslim. The general principle is: Everything is allowed, unless it’s prohibited. This is important to understand as many people have the wrong understanding about the “restrictiveness” of Islam, when in reality it only applies to the core elements such as belief, creed and worship. In Islamic commercial law there should always be a Aqd (contract), where there is an identified buyer, seller, terms of delivery, and time sensitivity of execution. One interesting thing to note: in Islamic commercial law you must actually own something to before you can sell it. So you guessed it; selling futures / options in Islam is Haram (forbidden).
I wanted to also mention a couple of core principles relating to Islamic commercial law, which incidentally resonates to a very ethical way of transacting with wealth. Islamic Finance aims to ensure that there is a system of comprehensive communal prosperity through financial transparency, validation of financial ownership and continuity of the circulation and investment of wealth so all parties can prosper. There is no “Lose-Win” relationships in true Islamic Finance, both parties need to share the risk and reward of a financial transaction.
Riba (Interest) is not allowed. Gharar (contractual ambiguity or uncertainty) is also not allowed as it provides an unfair advantage to one party over another. Protection of the environment and the social good is a requirement, so no investing in things that hurt the the environment or your fellow humans. Finally, there is no coercion in Islamic Finance, so all parties must approach the transaction from a fair perspective where everyone can prosper and win together.
I want to give a shout-out to Safdar Alam for his great content, point of view and support. You can find him here.
I hope my readers found this post insightful as a basis for further discussion in the futures about Muslim Financial Independence and Islamic Finance. Did you guys like the post? Please feel free to leave a message or leave me a note on my Contact Us page.
Today, we wanted to talk about a very important topic that you will need to master on your road to financial freedom. This is the all important SAVINGS RATE. Understanding your savings rate is critical to financial planning, budgeting and figuring out where and how much you are able to invest for your future. If you do not have a high-enough savings rate, it doesn’t matter how much you make because you are spending all of your money just living. Getting a handle on your savings rate can be the difference between retiring early, or delaying your retirement YEARS, even if you are making a high salary in relation to where you are living. The goal is to maximize your highest income earning years by saving as much money as you can.
So what exactly is a SAVINGS RATE?
Your savings rate if calculated by figuring out how much money you are taking home and subtracting the amount you are spending (to support your lifestyle); and monitoring how you are doing as a percentage of your income. Seems basic right? It absolutely is!
The equation looks like this: (Take home pay – spending) / (take home pay) , then multiply by 100 to get a percentage.
Let us create a hypothetical example to illustrate this concept.
Muhammad is 26 and has begun his career as a newly graduated structural engineer working for a corporation. He currently lives at home with his parents, has a used car that is paid off and does not have any real debt outside of a $18,000 student loan that he will need to begin paying off now that he’s working. He is in an entry level position making $68,000 / year, which translates to about $50,000 dollars after taxes. This leaves him with roughly $4166 / month in earnings.
Muhammad’s take home pay: $50,000 / year or $4166 / month
Now let’s take a look at Muhammad’s spending. He has had some financial literacy and Islamic training and has avoided riba (usury / interest) where he could, but he was unable to avoid getting a student loan to complete his university education. He likes to hang out with his friends from university, and helps out with bills and things for his parents from time-to-time.
His spending:
Loan amount – $18,000 at 3.95% interest across 120 months (10 years): $ 227.53 / month
Car insurance – $120 / month
Car gas – $150 / month
Cell phone – $70 / month
Internet and Netflix – $70 / month
Helping out with parent’s bills – $400 / month
Food and eating out – $500 / month
Entertainment – $380 / month
Clothing – $230 / month
Gym membership – $30 / month
Haircuts – $40 / month
Miscellaneous Expenses – $100 / month
Muhammad’s total spending: $ 27,810.36 / year or $2317.53 / month
So now looking at the savings rate formula, this will give Muhammad his maximum percentage that he should be able to save and invest with this current spending and income.
($50,000 – $27,810.36) / ($50,000)* 100 = 44.4 %
44.4% is an excellent savings rate for Muhammad to use for savings and investments. Realistically, Muhammad would probably leave some room in there, so 30 – 40% savings rate is still quite good for someone starting out in their career. Compare this with the average savings rate in America which is 5.7% (https://www.fool.com/saving/2016/10/03/heres-the-average-americans-savings-rate.aspx), Muhammad is off to a good start. Most financial experts and advisors recommend a minimum of 10 – 15 % savings rate just to ensure that you can continue to provide in the case of emergency, job loss and general life events.
I hope going over some basics of financial literacy was beneficial for my readers. We will continue to explore these topics and get into more complex ones as we move along.
Please comment if you found it insightful or if you have any thoughts on the topic!
AuthorComments Off on Financial Independence – The Basics
Getting Started
A new (and old) way of thinking about life and finances have been sweeping the globe in the form of “financial independence”. Financial independence is defined as the moment when you believe that you will have enough to live off of your investment income without having to work. You may also hear about FI (financial independence) referred to as FIRE (financial independence, retire early). Financial independence really aligns with the Islamic goal of striving to disconnect ourselves from excessive material wealth, ultimately reducing our desire to consume things we really don’t need.
Traditional financial independence is made up of 3 core principles:
Make money and save
Reduce spending and debt
Invest money to generate returns
Throughout the journey of this blog, we will be exploring Islamically-based perspectives and strategies to deal with these 3 major topics.
Making Money and Save
We will focus on various ways to maximize your earning potential in your prime earning years, as well as introduce tools and methods to establish a healthy saving rate as well as explore side hustles and the “gig” economy. We will also look at industry trends and career areas where newer workers can evolve their career. In this day and age, some careers pay higher and having more earning potential than others so providing advice on educational opportunities to improve skills will be beneficial.
Reduce Spending and Debt
The blog will also try and give you tools to budget, as well as identify where you can consolidate and ultimately eliminate debt. For Muslims, the primary vehicles of debt is traditional banking which comes with interest. In Islam, Riba (interest) is forbidden for both the borrower as well as the lender, so many of our strategies will be focused on eliminating forbidden debt as quickly in possible; while still trying to save money and invest. We will also explore new and exciting vehicles in Islamic Finance, which can allow us to borrow money for business / personal transactions that is still compliant with the Shariah (Islamic Law).
Invest Money and Generate Returns
We will also explore the concept of Islamically-compliant investing as well as ethical investment opportunities. Muslims have clear guidelines in the types of investing we can be apart of, so its important that we avoid forbidden industries such as sin stocks (weapons, alcohol, cannabis, casinos, pornography) as well as business where the primary profit is generated through interest (banks, trusts) or are overly leveraged with debt. We will also look at new and interesting companies, funds and financial opportunities that can offer us the ability to generate permissible returns.
Through this journey, we are looking to answer questions and get feedback from the community on interesting topics that the community would like to discuss. We look forward to using this platform to engage and provide value the Muslim Ummah (community) as a whole.
