What’s the difference between saving and investing? I’ll give you one example… it’s like the difference between opening a Cash ISA and a Stocks & Shares ISA.
A Cash ISA is essentially just a bank savings account, except that you don’t pay any tax on the interest you earn. But it’s likely to get you only around 1.5% at best, which isn’t even enough to keep pace with inflation. You’d be making a loss in real terms, but at least you wouldn’t pay tax on that loss — whoop-de-doo!
When you put money into a Cash ISA, or any other kind of savings account, it ultimately gets invested, you get your pittance in interest, and investment managers keep the rest.
Stocks & Shares
But if you go for a Stocks & Shares ISA, you choose what shares to buy and you get all of the profits from your investments (minus a small annual management charge) for yourself. Of course, you’ll shoulder any losses too.
But over the past century and more, investing in shares for the long term has beaten cash savings hands down. In fact it has to really, because cash savings can’t pay more in interest than is actually made from investing your cash.
The next question is, can you actually get as far as a million pounds by investing in an ISA? The easy answer to that is, yes you can.
I can say that confidently, because a survey of top providers has shown this year there are more than 250 individuals in the UK with at least a million in their ISAs. And there are a lot more with totals approaching that figure.
Some of those will be investors who took advantage of PEPs, the forerunners which started in 1987 before converting to ISAs. But, according to Interactive Investor, using up the full annual allowance every year from 1987 until today, and putting it all in the FTSE All-Share, you would have racked up a million.
That’s £1m from investing over a period of 32 years. So someone retiring today at 65 would have had to start at the age of 33 to have that million to add to their pension pot. Imagine what they could have achieved had ISAs been around when they were 18?
That’s using a technically very simple way to go about it — just put your investment money into a tracker fund every year and forget about it. But can you do better? I certainly think it’s possible.
I prefer dividend-paying FTSE 100 stocks myself, as I see them as the least risky on the market. And they include the ones that have grown to become cash cows today.
The long-term average annual return from UK stocks is approximately 8%, so let’s do some sums based on that. Using up your full £20,000 ISA allowance every year, it will take just 21 years to reach a million. Start today, and you could be a millionaire by 2040.
You might not have that much to invest, but just £100 per week could get you to a million in 36 years. The important thing is that every pound you invest, as early as you can, can make a big difference to how much you’ll have when you retire
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Views expressed 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.