In the past, it certainly hasn’t been easy to achieve ISA millionaire status. While ISAs have been in existence for almost 20 years now, up until a few years ago, annual contribution limits were low, meaning that it was a challenge to build up a large portfolio. For example, a decade ago, individuals could only place £7,000 per year within a stocks and shares ISA and £3,000 in a cash one.
Growing a portfolio to £1m with these constraints would have required some pretty impressive investment returns on a consistent basis. According to a recent Money Observer article, only 1,000 people across the UK have managed to achieve the milestone, so far. That’s an elite club.
However, for those aspiring to ISA millionaire status, there’s good news. In recent years, limits have become significantly more generous, meaning that investors can now save large sums of money tax-free. For the 2017/18 ISA year, individuals can place £20,000 in a stocks and shares or cash ISA and £4,000 in a lifetime ISA. The implication? It should now be much easier to build up an ISA portfolio of £1m over time. Here’s a look at how you could achieve this elite milestone.
If your goal is a portfolio worth £1m, starting early is the key. This is due to the power of compounding – the process of earning returns on previously generated returns. The beauty of compounding is that, over time, it results in the exponential growth of your money.
For example, let’s say you invested £10,000 today at 7% interest per year for 10 years. At the end of the 10-year period, your investment would be worth £19,672, a return of 97%. However, left invested for 30 years instead, that same £10,000 would grow to £76,123, a return of 660%. Left for 40 years, it would grow to almost £150,000, a return of nearly 1,400%. Can you see what’s happening? Compounding results in the exponential growth of your capital over time. The longer your investment time horizon, the better.
Ditch the cash ISA
To generate a huge sum within your ISA, it’s also important that you have your money working for you. That means, ditching the cash ISA and opting for stocks and shares or lifetime accounts instead.
According to City AM, the average interest rate on cash ISAs is currently just 0.91%. I hate to break it to you but if your capital is sitting in cash, it’s going to take a very long time indeed to grow to a million. If your goal is a £1m portfolio, get out of cash now and invest in growth assets that can consistently generate 8%-10% per year.
Lifetime ISA boost
Lastly, it could be wise to consider the lifetime ISA, if you’re aged between 18 and 39. This is a new product in which the government will pay you a 25% bonus on contributions of up to £4,000 per year, as long as you don’t withdraw your capital before you turn 60. In other words, if you pay in £4,000, you’ll receive a bonus of £1,000. That kind of boost to your savings really could put you on the path to millionaire status pretty quickly.
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