The problem with instant gratification is that it takes too long, as the late Carrie Fisher famously noted. The gratification of becoming a millionaire also takes time, but you can get there if you’re patient. So how patient do you need to be?
Two decades and a bit
Fidelity International has put a precise number on how long it could take the average UK investor to become a millionaire: 22 years and five months. That isn’t so long, giving our rising life expectancy. Fidelity points out that the tax-efficient individual savings account (ISA) allowance rises to £20,000 from 6 April. If you invested your full ISA allowance each year, your portfolio should be worth a cool million by around July 2038.
These figures assume that the ISA allowance rises by an inflationary 2% a year. They also assume your funds grow 5% a year before inflation and charges. If your portfolio grows faster than that, you could make a million that much sooner. Also, many private investors will have a healthy existing portfolio, and will already be well on the way towards hitting that target. Millionaire-dom for the masses.
Let the snowballs roll
Better still, all that money will be free of income tax and capital gains tax if held in an ISA, making you a tax-free millionaire, which is probably the best type of millionaire of all. Fidelity investment director Tom Stevenson says the sooner you start investing the better, because your money has more time to grow. This gives you more time to benefit from the magic of compounding, the snowball effect of generating earnings on top of previous earnings.
The disappointing truth is that it will take most investors longer to become a millionaire, because you have to be fairly wealthy to stow away £20,000 a year. Don’t give up if you can’t come anywhere near that, every penny you put away is a wise investment for your future, even if you never quite hit millionaire status. You can always throw in more as you get older.
Cashing out
The key is to start early: the first £1 you invest is the most important of all because it has more time to snowball, and grow into something big. You should also forget cash, because with the average savings account paying around 0.4%, and inflation at 1.6%, this will only destroy your money in real terms. If you had invested £15,000 in the FTSE All Share index 10 years ago, on 31 December 2016 you would have had £25,769. However, if you left the money in the average UK savings account, you would have a paltry £15,846, Fidelity calculates. That’s nearly £10,000 less.
You can start your bid for millionaire status by investing in low-cost exchange traded funds (ETFs) tracking indices such as the FTSE 100, FTSE 250 or S&P 500. At the Fool, we believe that if you have the time and the inclination, you can turbocharge your investments by building your own portfolio of individual company stocks. You know what it takes to become a millionaire, now you just have to do it.