How to try and turn a small ISA into £500k with this savings hack

Ben McPoland outlines a straightforward ISA investment strategy that could transform £10,000 into £500,000 within 19 years.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

ISAs can be fantastic wealth-building tools. With these tax-efficient accounts, it’s possible for me to build up a substantial amount of money over time, even when starting with a fairly modest sum of money.

Here’s how I’d aim to turn a modest ISA into £500k using this time-honoured savings hack.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

First thing’s first

Let’s assume I was starting out investing with £10k today. The first thing I’d do is put this money into a Stocks and Shares ISA rather than a Cash ISA.

Doing so, I have instant access to a vast array of investments to help me grow my wealth much faster than cash. These include individual shares, investment funds and trusts, and exchange-traded funds (ETFs).

Through such investments, I could realistically aim to grow my wealth with average annual returns of 8-10% a year over the long term.

Of course, this would be an average return target. The stock market doesn’t go up every year, so there will naturally be ups and downs along the way.

This is why it’s important to start with the right long-term mindset.

That hack? Compound interest

Earning interest upon interest – compounding returns – is the most powerful wealth-building force available to investors, I believe.

Left alone to do its things, the compounding effect can lead to exponential growth in the value of an investment. Of course, it also works the other way with debt, which is why it’s far better to have this force working for rather than against us.

Now, let’s say I were to build an ISA portfolio of investments that collectively returned 9% a year on average. That starting £10,000 compounded over 30 years would hypothetically become £132,676 (excluding any platform fees).

That’s without me adding a single penny more!

A potential compounder

So, what type of shares would I buy to start building a diversified ISA portfolio?

Well, one that I rate highly and own myself is Legal & General (LSE: LGEN). Founded in 1836, this FTSE 100 company provides insurance, investment management, and retirement solutions.

These are highly specialised areas, especially insurance where risk assessment can be very difficult to get right consistently.

Legal & General’s proven track record of successfully underwriting policies and managing assets has enabled it to raise its annual dividend over many decades. It even held its payout steady during the pandemic.

YearDividend per share
2024 (forecast)21.4p
2023 (forecast)20.3p
202219.4p
202118.5p
202017.6p
201917.6p
201816.4p
20084.0p
19983.3p

At today’s share price, the forward dividend yield for 2024 is a very juicy 8.8%. That means a £5k investment could generate me a welcome £440 in dividends. Then potentially more in future.

Having said that, it’s worth noting that dividends aren’t guaranteed. Furthermore, the company has a new chief executive and we’re yet to hear his plans and strategy.

I’m optimistic about the company’s long-term growth prospects as the population ages. But the market might not share my enthusiasm if the CEO’s vision stirs uncertainty. This could cause near-term volatility.

Aiming for £500k

The real compounding hack is when fuel is added to the fire through regular contributions. Therefore, I’d try to invest as much money as possible, building on that original sum.

If I invested a further £10k a year, while still generating a 9% return, I’d hopefully get to the £500k mark in just under 19 years. It could take just under 26 years to reach a million — or sooner with higher contributions.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Legal & General Group Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Down 44% in 2 months! Is this FTSE 250 green energy pioneer priced too cheaply?

After a sharp tumble in recent months, this FTSE 250 company with a growing order book is almost 90% below…

Read more »

Investing Articles

Investing a £20k Stocks and Shares ISA in this high-yielder might give me a £2,000 annual income

Harvey Jones is now wondering whether to pour his entire Stocks and Shares ISA allowance into a single FTSE 100…

Read more »

Investing Articles

Saving £20k in an ISA? Here’s how I’m aiming to turn that into a stunning £2,035 monthly passive income

Harvey Jones is keen to build a high and rising passive income by investing in a balanced spread of top…

Read more »

Investing Articles

How I’ll aim to turn an empty ISA into a £100k nest egg buying cheap shares in 2025

Christopher Ruane explains how he thinks taking a long-term approach to buying cheap shares and holding them could help him…

Read more »

Investing Articles

I love my Legal & General shares even more after today’s exciting update

Harvey Jones had high hopes for Legal & General shares when he bought them last year. So far he's got…

Read more »

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Is easyJet’s share price set to soar after strong 2024 results and upbeat business projections?

After tough years for the airline sector, easyJet’s share price has bounced back and its prospects look good. But how…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Is BP’s 6.7% dividend yield good value after the recent share price fall?

Despite the fluctuating oil price and BP's volatile shares, City analysts predict strong ongoing annual dividend payments ahead.

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

Up 42% from their 12-month low, is it time for me to buy this much-fancied FTSE growth stock after a 2% dip?

This FTSE 100 distribution firm achieved a lot in the past year and has good earnings growth prospects, but is…

Read more »