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An average person saves 12 to 15 per cent of their income for retirement, but if you want to become a millionaire in your 40s or 50s, this savings rate won’t cut it. Image Credit: Shutterstock

Dubai: There may be no proven sure-shot means to attain the highly-coveted ‘millionaire’ status, but those who have reached such a rank reiterate how getting there is possible in ways more than one.

It’s been often said that the average person saves 12 to 15 per cent of their income for retirement. However, if you want to become a millionaire in your 40s or 50s, this savings rate won’t cut it.

Example #1
Let’s say Max aims to be a millionaire before turning 50. He starts working at age 22 making Dh50,000 per year, saving 12 per cent of his income and gets a 5 per cent pay hike every year.

If Max invests his money in the stock market with an average return of 7 per cent (key stock market benchmarks indicate an average return of between 7-10 per cent), he would have about Dh520,000 by age 45 – which barely just gets him over the halfway mark to being a millionaire.

However, if Max were to save three times as much, putting away 36 per cent of his income, while keeping all other variables the same, he’d end up with Dh1 million before he turns 50.

So if you want to become a millionaire in your 40s or 50s, you need to go beyond traditional recommendations or even methods, meaning the more money you can save and put to work earning interest, the quicker you’ll get there.
How do you become a millionaire in the UAE?

Reality check: How practical is it to save as much?

Having a net worth of a million dirhams early in life, many years before you're ready to retire, would put you on track for stable, ample savings by retirement. But how practical is it really?

The reality is that being a millionaire is too high of a financial goal to reach for most people, as pursuing a high-earning career is a distant dream, either because of how expensive or competitive education has become or due to one’s inability to take risks early on in life.

So if one is unable to earn as much, saving nearly half of your income becomes a much harder or nearly impossible of a task.

Moreover, surveys on saving habits indicate that there remains a consistent trend wherein salaries are spent on bills, home or car loans, as soon as it’s credited to one’s bank accounts, with the thought of saving money usually being an afterthought – using whatever is left over after everything else is paid.

A quicker way to drain your salaries is by taking on debt. When you owe money, part of every dirham you make is already spent before it ever hits your bank account, particularly when living beyond your means – meaning you take on more debt to afford things you can’t pay for with the money you make every month.

Investing, the only other way to become a millionaire?

Apart from saving money or paying down debt – which can take longer and cumbersome for most, investing your money is another way to go.

However, experts say that more than it being accepted as an entirely different method to pave the way to a million dirhams, it should be considered as means that go hand-in-hand with savings.

Investing relies on the power of compound interest to help you accumulate wealth from small contributions over time.

Example #2
For example, if you make 10 per cent on a contribution of Dh10,000 (key stock market benchmarks indicate an average return of 7-10 per cent), you'll make Dh1,000 in interest, leaving you with Dh11,000.

The next year, you'll make Dh1,100 in interest, and so on it goes, which will double your initial investment in seven years. Given enough time and contributions, anyone can turn relatively modest contributions into an impressive sum.

Risks or downsides involved

You would need to consistently make regular contributions, even if it only amounts to a few thousand dirhams a year, and as long as you're budgeting and seeking extra income whenever necessary, you should be able to set aside these funds.

Another possible pitfall people face when it comes to investing your money to eventually reaping a million dirhams, is not allocating your hard-earned money towards the right investments.

There are many options here, including index funds, stocks, bonds, real estate, and REITs, each with unique perks and risks involved. Veteran investors continue to recommend that the best portfolio will be diversified with many types of assets, to balance out the prospective risks of each asset type.


Winning strategy to investing and saving big

The strategy that investors often reiterate is you need to keep adding to your savings and investing the money, so it has time to grow. However, having all of your eggs in the same basket makes it more likely that you will lose the value of your investment if something happens.

For example, people who were heavily invested in real estate saw the value of their portfolio sharply decline when the real estate market crashed. This is why it’s important to have a variety of investments that can help you spread your risk.

The best way to build wealth and protect your assets is by diversifying your investments. Don’t just put all of your money in stocks or in real estate. Instead, pick a few different asset classes for your cash and spread your risk.

It’s best to look for assets that have an inverse relationship. For example, a well-diversified investment portfolio contains a mix of stocks and bonds. That’s because they behave in different ways with the ups and downs of the market to balance out your earnings.

Key takeaways?

If you're currently held back by a low paying job or higher-than-usual expenses for a prolonged period of time, becoming a millionaire may seem like a completely impossible task at first.

However, depending on your requirement and appetite for risks you would find that one or more of these methods would help meet the goal in more ways than one.

Contrary to a popular myth, you don't have to win the lottery to see seven figures in your bank account. For most people, the only way to retire with a million dollars is to save it up over time.

Moreover, to bust another myth, you don't have to live like a pauper to build an adequate nest egg and retire comfortably. If you start early, spend adequately, and save diligently, your million-dirham dreams are well within reach.

Success stories of UAE millionaire investors

Millionaire Habits: Tips to fast-track to the much-coveted status

Avoid taking loans to buy depreciating assets

Avoid taking out loans to buy depreciating assets such as a new car since it just compounds the loss. When your car loses value, you could end up paying interest on an asset that’s not worth the full value of the balance.

Put your money toward buying things that increase in value over time such as real estate, stocks, and bonds. When you buy a depreciating asset, buy it used to avoid the steep initial loss in value.

When investing, buy appreciating assets

One of the best ways to increase your net worth and your wealth is by focusing on spending your money on appreciating assets. One example of an appreciating asset is real estate where the value increases year-over-year in most cases.

On the other hand, a purchase such as a car is a depreciating asset. The moment you drive a new car off the lot, it quickly starts to lose its value. In the first year of ownership, a new car loses 20 per cent of its value. This means that if you spend Dh40,000 on a new vehicle, within one year, you would have lost Dh8,000.

Owning a home doesn't delay, but advances goal

Many of us rent a home or an apartment because we cannot afford to purchase a home, or because we aren't sure where we want to live for the long term.

Even if that’s okay, renting is often considered by financial planners as not an apt long-term means of investment because buying a home is a good way to build equity.

Unless you intend to move in a short period of time, it generally makes sense to consider putting a down payment on a home. At least this way, over time, you can build up some equity and the foundation for a nest egg.

Buy stocks that are cheap and on steroids

Stocks still offer the best choice if your long-term goal is to hit the million-dirham mark. As the market’s performance crash underscores, taking advantage of big declines to buy stocks can pay off handsomely. What’s key is that the more share prices drop, the greater the future opportunity.

One way to boost your gains is to set thresholds for buying on the dips. You could do so after a decline of 10 per cent, for example. And if stock prices fall another 10 per cent, buy more. However, one cannot rely on this method to get short-term gains, only long term ones,

Another fairly sure way to make a million bucks in stocks is to go for growth and not worry so much about the price. Your chances of earning spectacular returns improve if you invest on companies that are generating equally spectacular sales and profit growth.