Premium Bonds are a popular investment in the UK. In fact, they’re one of the UK’s biggest savings products, with around 22m people – which equates to around one-out-of-three people – across the country using them as a savings vehicle. Today, more than £70bn is held in Premium Bonds.
At first glance, it’s easy to see why Premium Bonds are so popular. Once bonds have been held for a month, they are entered into a monthly prize draw where bondholders can win between £25 and £1m tax-free. Every month two lucky people win prizes of £1m. This means that people literally become millionaires overnight. The more Premium Bonds you own (you can invest up to £50,000 with each bond costing £1), the greater the chances of winning. Sounds interesting, right? Who doesn’t want to become a millionaire?
Are Premium Bonds the easiest way to become a millionaire though? I’m not convinced they are. Here’s why.
Odds of winning
When you dig a little deeper into the odds of winning a prize, the appeal of Premium Bonds declines.
For example, the overall odds of winning a prize are around 24,500 to 1 for each bond number, according to the Premium Bonds website, while the odds of winning the £1m prize per £1 bond in one month are around 36bn to 1, according to money-saving expert Martin Lewis.
To put these numbers into perspective, Lewis reckons that if you lined up everyone with £1,000 of Premium Bonds in order of their year’s winnings, you’d have to walk past almost two-thirds of the line until you hit the first £25 winner. In other words, the majority of Premium Bonds investors are regularly seeing no return on their investment.
So, while we often hear about those who have just won a million pounds through Premium Bonds in the media, it’s important to remember that, in reality, the odds of winning are very low. Forget a million – many people are winning nothing at all.
An easier way to get rich
An easier way to make a million, in my view, is through investing in shares. Shares won’t transform you into a millionaire overnight, yet with the stock market generally returning around 7-10% per year on average over the long run, it’s certainly possible to generate life-changing wealth over the long term. For example, at a 10% return per year, £50,000 grows to over £1m in around 32 years.
Of course, the stock market can be volatile in the short term. There’s a risk of losing money. Yet if you’re willing to invest for a long-term investment horizon of 10 years or more, the odds of losing money decline dramatically and there’s a good chance you’ll generate a solid return. Invest regularly and minimise risk and there’s every chance you could eventually make a million.
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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.