Six steps to making your first million dollars

Start saving early, be careful with debt, invest in a diversified portfolio, buy property and increase your income sources, experts say

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Building a net worth of $1 million may seem like a far-fetched goal at first. But it is a realistic target if you allocate your funds well, financial experts say.

You don’t necessarily need to win a lottery, inherit a financial windfall or participate in get-rich-quick schemes to join the millionaire club. Careful planning, patience, disciplined spending and consistent investing strategies can grow your wealth to $1m over a period of time.

There are more than 50 million millionaires in the world today, according to Credit Suisse's Global Wealth Report 2020.

“No one can give you a guaranteed formula for becoming a millionaire by a certain date,” says Aman Moti, wealth adviser at Holborn Assets.

“However, there are certain principles that can help you on your way towards making your first $1m.”

Here are six tips to make sure your $1m dreams are attainable.

Understand compound interest

The easiest way to build your wealth is to start saving money as early as possible to take advantage of compound interest.

Compound interest is simply interest on interest, but its effect can be incredibly powerful, says Rupert Connor, partner at Abacus Financial Consultants.

“A simple example is a $1,000 investment paying 5 per cent annual interest. After one year, you would have $1,050. Then in year two, you would get 5 per cent of $1,050, which is $52.50, totalling $1,102.50,” he says.

“In year three, you would get 5 per cent of $1,102.50, which is $55.13, totalling $1,157.63. And so it goes on, accumulating interest upon interest, generating progressively larger returns as the interest compounds over time.”

Start to build up savings as early as possible because the longer you have money invested, compound interest will grow it more than you may think, Stuart McCulloch, market head of The Fry Group Middle East, recommends.

“It is the money you save in the early years that becomes a large percentage of your final pot,” he adds.

Be strict with debt and credit

Prioritise your spending and cut back on the “nice to haves” to the extent that you live well within your means, Holborn Assets’s Mr Moti says.

You should aim to save at least 20 per cent of your monthly income, if not more, according to the 50:30:20 rule, he says.

Under this model, 50 per cent of your income goes to necessary expenses (such as food, transport and rent), 30 per cent towards personal expenses (such as entertainment and travel) and 20 per cent towards saving.

Take credit or debt only when you absolutely have to and be very aware of the interest rate that you are being charged, Mr McCulloch says.

“The cost of debt is normally excessively more expensive than the returns you can make on investments, so look to pay off debt where possible before saving or investing more,” he says.

Try to stick to a disciplined approach in which you save when you can and don’t let it slip because there is always something you could spend it on instead, Mr McCulloch says.

The disciplined investor will always do better than the occasional saver, he says.

Invest your savings

Very few people get rich by saving alone.

The amount you need to invest to become a millionaire depends on what stage of life you are in. You can afford to invest less money when you’re younger because you have more time to accumulate wealth and can tolerate more risk. If you put off investing until you’re older, then you’ll have to put away more money every month, experts say.

“Out of the three key asset classes — stocks, bonds and cash — historically, cash has offered the poorest returns,” Mr Moti says.

“Over the long term, returns from cash barely keep up with inflation in most economies. To make your first million and build wealth, you need to invest and stocks have historically delivered the best returns.”

Many people invest money to save for retirement and it is done through vehicles such as pensions or investment accounts, Mr Connor says.

“Ninety per cent of returns come from diversification, so ensure your money is spread across all major asset classes and try to be in a diversified global portfolio,” he says.

It is also very important to periodically rebalance your investment portfolio, Mr McCulloch says.

“The risk assets will normally increase quicker and therefore the percentage you hold will increase, which increases your risk exposure,” he says.

“It is good to take the asset allocation back in line with your risk tolerance and to effectively lock in some gains that you have seen.”

Invest in rental property

Purchasing a rental property is a common way for an individual to generate an income stream, Mr Connor says.

It is similar to investing in that you take a sum of money to buy the property and the unit then returns a cash flow in the form of rent.

Save enough to make a down payment on a rental property with a strong positive cash flow, Mr Moti says. This means that after you pay the bills, there is money left over to go into your bank account.

Over time, your tenant will pay off the mortgage and you will own the property outright. You will also be able to benefit from capital appreciation on the asset value, he says.

“You will have expenses related to this that are different from investing, such as a mortgage, utilities, property taxes, among others, which must be taken into consideration when calculating a return on rental property,” Mr Connor says.

“Timing and location play a huge part in an investment property’s success, so it’s always worth speaking to an expert.”

Build your career

A good job is your best starting point towards building your first million dollars, Mr Moti says.

Invest time in your career and master your craft. Once you are good at something, you will attract the right opportunities within your specialisation, which will lead to quick progression and help you make your first million dollars, he says.

“Choose a high-income skill that helps businesses bring in revenue, such as marketing or sales,” Mr Moti suggests.

“You can learn them relatively quickly and they’re transferable across many industries. Once you make enough money, you can then scale and invest your profits.”

Develop several streams of income

Diversify your businesses and investments into various, non-correlated sources of residual income so that you’re never reliant on any one source, Mr Connor says.

If you build a portfolio of non-correlated streams of income and your risk is reduced, it makes your wealth more stable and secure, he says.

“There is a lot of content to read about how the average millionaire has seven streams of income,” he says.

Updated: May 01, 2022, 5:09 PM
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