How to become an ISA millionaire
You can use your ISA allowance to boost your chances of joining the millionaire’s club
With the ISA allowance now £20,000 you could become an ISA millionaire in as little as 25 years by investing your full ISA allowance each year.
Joining the exclusive millionaire’s club is now closer than ever, thanks to the £20,000 allowance and the tax-efficient nature of ISAs that enable you to build up a pot of money inside your ISA without the tax man being able to get his hands on a penny.
Here’s how to do it.
How to join the millionaire club
1. Start now
The sooner you start, the better. It’s not rocket science, it’s just that the more time your money has to grow and benefit from the magic of compounding, the better off you’ll be.
Called the eighth wonder of the world by Albert Einstein, no less, compounding - a sort of snowball effect which sees your pot of money grow and grow as you generate earnings on top of previous earnings - will get you into the exclusive millionaire’s club sooner.
2. Save as much as you can afford
Obviously, the more you can afford to save, the quicker you’ll get to that seven-digit figure. You will get to the magic million in 25 years if you invest the full amount at the beginning of the last tax year and then continue to invest the full amount at the start of each tax year going forward. This is based on the assumption that you achieve an annual growth rate of 5% before platform charges are deducted.
But if you don’t have the full sum to hand right now, don’t let that put you off. Set up a regular savings plan, pay in what you can afford and you’ll soon see your ISA savings grow. It might take you a little longer to join the millionaire’s club, but every pound you invest is a step closer.
Investing smaller sums, but on a regular basis has other advantages too. Firstly, there’s no great sacrifice required. You set a sum aside that you know you can afford, arrange a standing order so the money goes into your savings pot automatically and you will find you can make saving effortless.
Secondly, by drip-feeding your money into the market regularly, you will benefit from a process known as pound cost averaging. This means that you buy more units when prices are low and fewer when prices are high. Buying at a variety of prices and spreading ongoing investments over time helps to cushion your portfolio from dips in the stock market.
3. Save without sacrifice
Talking of saving without having to make huge sacrifices, see if you can claw-back a little cash to pop into your ISA savings from your current outgoings. Rather than blowing a surprisingly hefty sum on your daily caffeine fix, ditch the trips to the coffee shop and put the money you would spend towards your potential million pound pot. While a coffee may not seem like an extravagance, all those trips to the coffee shop soon add up. Grab one every day on your way to work and you’ll easily blow more than £5801 a year. Is that really a great sacrifice?
4. Give up the ghost
The same goes for that unused gym membership and the magazine or film subscriptions that you don’t even use any more. Take a look through your regular direct debit payments and keep an eye out for ‘ghost payments’; those regular payments you set up ages ago that you’d forgotten all about - but are still paying for. Couldn’t that money be put to far better use inside your ISA?
5. The world is your oyster for greater gains
Building a diversified portfolio is the key to making your money grow - whatever happens. By spreading your investments across different asset classes - from cash and bonds at the lower end of the risk spectrum, to individual shares and funds - you can help keep the gains coming in, whatever happens in the global economy or on a political level.
Whether you want to put your money into large, blue chip stalwarts, or small up-and-coming companies, whether you want to take a punt on companies in emerging markets like India and Latin America or stick to global ‘names’ from the US or Japan, whether you’re a fan of gold or like the look of property, you can build your portfolio to follow trends, back hunches and build your income.
And by investing in any of the funds in our Select 50 range of preferred funds you get to tap into the expertise of the managers running these investments, giving you one less thing to worry about.
Then, once that’s sorted, all that’s left for you to do is dream of all the fabulous things you’ll do once you hit that ‘magic number’.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Investors should note that the views expressed may no longer be current and may have already been acted upon.
Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances.
There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Investments in small and emerging markets can be more volatile than those in other overseas markets. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment.
Property and land can be difficult to sell so an investor may not be able to sell /cash in this investment when they want to. The value of property is generally a matter of a valuer's opinion rather than fact.
This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
1Based on a regular (‘medio’) sized cappuccino from Costa at £2.55, working 231 days a year. Price as at 10 December 2018.