There are many ways to become a millionaire. You could win the Lottery. Hit the Premium Bonds jackpot. Rob a bank (or become a banker). Design a must-have app. Become a globally-famous celebrity. The drawback is that only one a million will get rich that way. But there’s a way for ordinary people with average luck to become millionaires, provided they have a few thousand pounds to spare each year, and a little patience.
Who wants to be a millionaire?
It really is possible to become a millionaire from investing in stocks and shares, by using your tax-efficient individual savings account (ISA) allowance to the max. Hundreds of investors have already become done this since the savings scheme was launched in 1999, and you could join them.
Last year, Barclays stockbrokers revealed that 67 of its clients were ISA millionaires, and there must be plenty more on other investment platforms. None of them became an ISA millionaire overnight because investing in stocks and shares isn’t a get-rich-quick enterprise. Quite the reverse, it’s a great way to get rich slowly. The sticking point is that you need to invest a tidy sum each year.
Thanks a million
You could hit that financial milestone a lot faster now that Chancellor George Osborne has expanded the ISA allowance. This tax year you can invest up to £15,240 in a stocks and shares ISA, and pay no income tax or capital gains tax on your returns for the rest of your life. From 6 April 2017, you will be able to invest a whopping £20,000, five times Chancellor Gordon Brown’s original ISA limit of £4,000.
New research from Fidelity International shows that investors who take full advantage of their allowance can become an ISA millionaire in “just” 24 years and one month. These figures assume you invest your maximum ISA allowance from this year, and continue to invest as the allowance increases by an assumed 2% every year. It also assumes your savings grow by 5% year after year, after charges. Of course, they could grow faster. Or slower.
Dash from cash
To hit that million, you must invest in a stocks and shares ISA, rather than safe but dull cash, as the potential rewards are far higher. If you had invested £15,000 in the FTSE All Share index on 29 February 1996 you would have £51,866 today. But if you had put it in the average UK savings account you would hold a paltry £20,345, Fidelity says. The difference is a mighty £31,521.
These figures also assume you reinvest all your dividends for future growth, which is the key to long-term investment success. Without income reinvested, the FTSE 100 is still 11% below the 6,930 it hit on 31 December 1999, but with income reinvested it’s more than 70% higher.
Not every ISA investor will make that million. Most of us simply can’t afford to pay £20,000 a year into a stocks and shares ISA (me included). But it pays to aim high, because even if you fall short you should still wind up far richer than if you never tried at all.