Ordinary everyday working folk can, and surprisingly often do, become millionaires just by careful saving and investment. Don’t believe me? Well, actually, quite a few people don’t, and they point to my own lack of millions as evidence that I must be talking nonsense — but I put that down to my own ignorance early in life and my failure to save and invest carefully from a young enough age. And you can do better than me!
I’m not just talking about happening to get in on each and every boom at the right time and jumping ship before the busts come along. Sure, if you’d got the timing right in the dot com boom, bought the long-term winners like Amazon.com, Inc and Apple Inc. and not been burned by the 99% losers when the bubble popped (or sold them at just the right time), you’d be well on your way to great wealth.
Or closer to home, if you’d been able to time the ups and downs of online fashion pioneer ASOS, boom-and-bust jack-of-all-trades Quindell (now renamed Watchstone Group), or hit the pre-crash banking boom with Barclays and Lloyds and got out in time… well, you wouldn’t need to listen to me. But very few of us can hope to ever get that lucky, so what should we do instead?
A better way…
The best way for most of us is surely to invest in top quality blue-chip shares and keep them for the long term, reinvesting dividends — and avoid the short-term fads and fashions that are as likely to lose you money as make you a fortune.
Let’s say you’re in a position to invest £1,000 a month (that’s a lot, but a sizeable portion of the population could manage it), and I’ll go for a deliberately optimistic annual return of 12% including growth and dividends — that would get you to that envied millionaire status in 21 years, which really isn’t very long at all.
But 12% is probably pushing it, so what if you achieved 6% per year, which is pretty close to the real long-term returns from the market? Well, even with only half the annual return, it would still only take an extra 10 years to exceed a million in the pot — and 31 years again isn’t too much out if what will hopefully be a long (and potentially prosperous) lifetime.
But £1,000 per month might well be too much for you, so how about dropping that by half to £500, still with returns of 6% per year? Do you think that might double the time needed to 62 years? Nope, it would add just another 10 years, taking you 41 years to reach a million. That might sound surprising, but it’s the early years that make the biggest difference.
£500 per month too much? OK, how much will you need to invest per month over a typical 50-year working life to retire with a million stashed away? It would take just £280 per month… so if you can stash that much away in an ISA every month (to maximize the tax benefits too), you could be well on your way to a comfortable retirement.
Oh, and talking of ISAs, research by The Telegraph suggests there are already close to 200 ISA millionaires in the UK, and that there could be as many as 2,000 by 2020!
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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK owns shares of and has recommended Amazon.com, Apple, and ASOS. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.