Becoming a millionaire is a lot easier than most people realise. Forget about the lottery, Bitcoin, setting up the next Facebook or any other get-rich-quick scheme. The easiest and most reliable way to reach £1m is by investing regularly in the stock market, over a long period of time. Let the market and the power of compounding do the rest.
It would take 87 years to turn a one-off £10k lump-sum investment into £1m (assuming a return of 5.5% – the average annual inflation-adjusted return of UK stocks over the last 50 years), which is far longer than most of us are prepared to wait. But when regular investments are added into the mix, that figure reduces dramatically.
By investing £500 every month, that initial £10k turns into £1m in 42 years. In other words, someone lucky enough to be able to invest that much at 18 could become a millionaire by 60. And more than three-quarters of that total would be an investment gain. With 60 being the new 50, that extra wealth could really be put to good use and fund an enjoyable lifestyle.
Now obviously, £500 is a lot to be investing every month when you’re only 18, and most people aren’t in the fortunate position of being able to do this. So, if £250 per month (p/m) is invested, instead of £500, then it would take a further 10 years to reach £1m, again with an initial £10k investment.
It’s not really the value of the initial investment that’s important, rather it’s the value of the regular investments. For example, if the initial investment is doubled, to £20k, it only reduces the amount of time to reach £1m by two years. An initial investment of £50k only takes six years off the timeline – all when investing £500 p/m.
In reality, it’s very unlikely that we are going to be investing the same amount every month over such a long time period. Using common sense, it’s more likely that we will be able to invest more when we are older and earning more, than we can when we are young and earning less. So, investment contributions are likely to start off small and then rise as time goes on.
Taking this into account, a more realistic way to reach £1m from an initial £10k investment over 42 years is by starting off with just £250 p/m for the first 10 years, before upping to £500 p/m for the next 10 years, and then increasing to £750 p/m for the remaining 22 years.
I would favour investing smaller amounts regularly over making larger investments infrequently, as this allows entry points to be averaged out over entire stock market lifecycles, meaning there is less need to worry about valuations.
I would also recommend investing a set amount at the start of the month, rather than waiting until the end and investing what’s leftover. And remember, always invest using an ISA – otherwise you could end up paying tax and reducing returns!
The calculations above all take inflation into account and demonstrate how long it would take to earn the equivalent of £1m in today’s money. In reality, the £1m would be reached sooner, but inflation would mean that it would be worth much less than £1m today.
The calculations are also based on average historical returns. Pick the right stocks and you could reach the £1m mark much sooner.