Stop saving and start investing! My plan for turning £100 per week into a £1m ISA

Would you like to save £100 per week and end up with £1m? Here’s my plan for achieving that. You probably already know all about the process of compounding – it’s key to making your money multiply. Every year you earn interest or a return on your money and add it to the original amount.

The next year, you get interest or earn a return on the original sum plus on the previous years’ interest that you’d ploughed back in. And on it goes, year after year. Voila! You’ve achieved compounding

The eighth wonder of the world?

Albert Einstein reportedly said compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it. The great thing about compounding is that it multiplies your money exponentially, which means the absolute returns you get every year get bigger and bigger.

There are two variables that make a huge difference to your eventual outcome. One is the length of time you spend compounding your money, and the other is the rate of annual return you earn on your money.

Indeed, small changes in the rate of return you earn on your money make big differences to your savings pot in the end. So, it would take too long to accumulate a million by stashing £100 each week in a cash savings ISA, for example. Interest rates are around 1.5% with many savings accounts and that’s just not high enough, so we need to look elsewhere for a higher return to make my plan work.

Roland Head recently pointed out that the FTSE 100 index of big-cap shares on the London Stock Market is yielding a dividend of around 4.4%, which is a good start. But the long-term average return from the UK stock market, if you add on the capital gains from generally rising share prices, is around 8%. Therefore, I’d go for a Stocks and Shares ISA instead of a Cash ISA in order to turn a £100 per week investment into £1m.

Investing for higher returns

Within the Stocks and Shares ISA you could invest in individual shares, or managed funds if you don’t have the time to put into picking shares. But perhaps one of the easiest ways to capture that anticipated 8% annualised return from the stock market would be to invest in a low-cost index tracker fund that follows the FTSE 100 index, or maybe one that follows the FTSE all-share index. If you opt for the ‘accumulation’ version of the tracker instead of the ‘income’ version, all your dividends will be automatically reinvested, thus setting you on the road to compounding your money.

For many, investing the £100 per week as a monthly sum of just over £433 would be more convenient. And this is what to expect if the return compounds at 8% per year when annualised:

Within 20 years the returns you’ll be getting could be greater than the amount you are investing each week. I think the table is a powerful illustration of the appeal of investing in a Stocks and Shares ISA.