It’s easy to fritter money away, but I would rather put it to work by investing small, regular sums in a Stocks and Shares ISA. Over time, putting away a pound or two every day can build up into something worth having.
By stretching that to £10 a day, roughly the price of a morning coffee and lunchtime meal deal, I can start to build serious money for retirement.
Stocks and Shares ISA millionaires do exist
Drip-feeding monthly sums into FTSE 100 shares strikes me as an attractive way to build a large pot of personal wealth. If I generate a return roughly in line with the FTSE 100 long-term average of 7% a year, my £10 a day could eventually be worth hundreds of thousands of pounds.
That is all due to the power of compound interest. By re-investing all the dividends I receive straight back into my portfolio, I would turbocharge my total return. If I started young, say age 25, my £10 a day would have grown to £779,675 some 40 years on, when I’d be 65. That money would also be free of all income tax and capital gains tax.
I would have made total contributions of £146,000, while compound interest would have delivered a staggering £633,675 of my ultimate total.
That would leave me short of a million, which is why I would take a second step. I would increase my contribution by 3% every year, to help it keep pace with inflation. If I did that, I would have a portfolio of £1.14m after 40 years.
Now 40 years is a long time. Sadly, I’m much closer to retirement than that. An investor who was 20 years away from hanging up their boots and invested just £10 a day would only build savings of £201,482, assuming the same 7% return. It pays to start early and stick with it.
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With luck, they may have other sources of retirement savings, such as a workplace pension. But late starters will have to work harder if they want to make a million.
That’s easier said than done, especially as money is so tight these days. But one way I would aim to generate a better return is to invest in individual FTSE 100 stocks.
This is riskier than simply purchasing a FTSE 100 tracker, but I would combat that by building a portfolio of around a dozen companies in different sectors and with contrasting risk profiles. That way if one or two disappoint, others will hopefully outperform.
With luck and careful research I would hope to generate a return of more than 7% a year, but as ever with investing, there are no guarantees. If I managed to up my average annual return to 10%, my £10 a day would turn into £1 million in 32 years, instead of 40. Again, this assumes I increase my contribution by 3% a year.
The truth is that most of us will not become a Stocks and Shares ISA millionaire. Yet that’s only a dream target figure. Even if I generated, say, half that amount, I could still look forward to a more comfortable retirement than if I had never tried.
