Dubai: Every expatriate wants to go home richer after years of working abroad. But with financial responsibilities piling up on one end, and costs on the other, saving for the future often takes a back seat.
Depending on your income level and financial discipline, it is still possible to build a considerable amount of nest egg – even Dh1 million if you save regularly.
Research shows that about 9 years is the average amount of time an expat stays in the Middle East and money managers evaluate that as plenty of time to convert hard-earned savings into potential millions.
Let’s say you deposit Dh1,000 in an account earning 1 per cent annual interest, equating to Dh10 in interest after a year. With compound interest, in the second year you would earn 1 per cent on Dh1,010 (the principal i.e. deposited amount plus interest), equating to Dh10.10 in interest pay-outs for the year.
Amass Dh1 million savings in 7 years?
“Even by saving a maximum of Dh5,000 monthly for seven of those nine years, expatriates have the potential to more than double their money and make themselves a million, whether it be in UAE dirhams, US dollars or British pounds,” said Dubai-based wealth advisor Mohammad Shaan.
“Achieving the Dh1 million target is possible if the saver commits to set aside a fixed amount of money and take advantage of the power of compound interest. After the seven-year period, the saver, however, should not touch the money for another 13 years.”
Even if the saver can save just half of that amount, i.e. Dh5,000, Shaan added that it is still possible to achieve the million dirham target but it would require the saver to save for twice as long.
If a 30-year-old saver was to save Dh5,000 a month for seven years at 5 per cent interest but left the savings pot to mature at a modest 6 per cent interest estimate until the age of 50, he or she would have earned Dh1 million.
You do, however, need to be sure you’re exposing yourself to an appropriate level of risk and building a diversified portfolio – whether that includes stocks, bonds, cryptocurrencies, ETFs (exchange-traded funds), or a mix of all different investment types.
Save early, then put the money to work
“It is clear to see the benefits of saving earlier but for less time using the power of compound interest,” said Andrea Barber, an Abu Dhabi-based financial planner, who has been residing in the GCC for over two decades.
“The idea is to invest a decent amount of savings every month and then do not touch it for as long as it took you to save, so that it accumulates interest, which eventually grows the savings pot into a million.”
So, the total investment is less than half a million (Dh420,000). Saving Dh5,000 monthly may be too high for many expatriates, however.
When you earn about Dh5,000 a month, said there is no way you would hit the Dh1 million target if you leave the UAE within a decade.
Achieving the Dh1 million target is possible if the saver commits to set aside a fixed amount of money and take advantage of the power of compound interest.
What if you earn only Dh5,000 every month?
Shaan said the figure is just an example to show how people can use the power of compound interest to their advantage. “Anyone could set aside smaller or bigger amounts for a longer or shorter amount of time, but the principle is still the same,” he added.
“The trick is to start saving as soon as possible and have the discipline to contribute regularly and the patience to leave it for when you need it. This is a long-term savings strategy, not a short-term solution,” Shaan pointed out.
This doesn’t mean letting your Dh5,000 monthly saving “go stale” in a bank account. Shaan said, the key is to ensure the money earns 5 per cent interest and that this can be done by “investing in multiple assets at the same time, rather than just a savings account, which often provides low interest rates.”
“This means spreading out savings across a portfolio of equities, bonds, property, commodities (raw materials or basic goods), foreign exchange, alternative investments like cryptocurrencies and cash.”
Go at it alone or consult a money planner?
Savers, however, are advised to consult a financial planner, to come up with an effective savings or investment strategy. Barber said it’s possible for expatriates to invest on their own, but this won’t guarantee positive results.
“If you don’t know what you’re looking for, it’s a case of where do you start? You wouldn’t fly an airplane without correct training so why would you invest your money into something without the correct training?” Barber explained.
“Essentially, the risks are higher doing it yourself and although people are put off with the initial outlay of a financial advisor, it is nothing compared to the potential loss of a bad investment. The point of an expert is to get to know you and advise what is right for you. Your savings plan should mirror your aspirations, lifestyle, [among other things].”
The idea is to not touch your savings for as long as it took you to save, so that it accumulates interest
Can I retire a millionaire if I’m 50 years old?
If you start saving early, you can even reach seven figures by age 50 and consider settling down early. But what if you are starting to save from scratch at age 50, while still targeting to save Dh1 million in another 15 or so years? Although you are behind, you can still make this financial milestone happen.
To reach a Dh1 million target in 15 to 20 years and aiming to let your savings grow at a four per cent annual return, which is approximately what average investors earn doing it themselves, you need to set aside and invest Dh92 per day, implying Dh2,798 per month and Dh33,581 per year.
However, when targeting a 10 per cent annual return, you need to set aside and invest Dh48 per day, which equates to Dh1,455 per month and Dh17,460 per year.
Additionally, most experts reiterate that your retirement income should be about 80 per cent of your final pre-retirement annual income. That means if you make Dh100,000 annually at retirement, you need at least Dh80,000 per year to have a comfortable lifestyle after leaving the workforce.
“Building a million-dirham investment or retirement nest egg may not be as hard as you think,” Shaan further noted. “However, saving hundreds or thousands of dirhams per month is often perceived to be difficult or even impossible for many newbie investors.”
“But you can also boost your savings by making sure you're investing aggressively enough. While you don't want to invest in extremely risky stocks, it's also important to avoid being too conservative.”
A better option, then, is to buy stocks from strong companies and hold them for as long as possible, said Shaan, while adding that these investments may not earn explosive returns, but you're less likely to lose money over time.
You can also boost your savings by making sure you're investing aggressively enough.
Most key exchange-traded funds, for example, may only earn average returns of around 10 per cent per year. But most key stock index benchmarks have a long track record of surviving market crashes and economic downturns, so it's a safer bet than stocks from trendy new companies.
Experts often reiterate that if you're investing heavily in bonds, for example, you'll earn much lower returns than if you'd invested in stocks. Over time, those lower returns are going to make it much harder for your money to grow.
However, if you are just getting started but if you have some money saved, you are going to have an easier time hitting this big milestone. In the end, it really boils down to three things: time, compounding interest and savings.