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My simple plan for a £1m ISA with just £250 a month

Making £1m in the stock market might seem like an unrealistic dream but, according to my figures, it’s entirely possible to hit this target in a relatively short period. And you can do so without having to be an investing genius or qualified accountant. So I’m going to explain my simple plan for a £1m nest egg with just £250 a month. 

Tax-free

I believe the best instrument to use if you are going to try and make a million in the stock market is an ISA wrapper. The great thing about ISAs is that any money you make inside this investment wrapper is tax-free. So you don’t have to worry about handing any of your profits over to the taxman — that applies for both income tax and capital gains.

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You can save a maximum £20,000 a year in an ISA, which easily covers the £250 a month contribution I believe is required to make a million. The best way to invest these funds is, according to my calculations, in a low-cost FTSE 250 tracker fund. Over the past decade, the FTSE 250 has produced an average annual return of around 12.5%.

There’s no guarantee this will continue, but I believe there’s a strong chance over the long term, the index’s average annual return will be in the high-single, to low-double digits. So, for this article, I am going to assume that the FTSE 250 will yield an average annual return of 10% for the foreseeable future.

At this rate of return, I calculate an investment of just £250 a month that increases in line with inflation will be enough to help you make a million within three decades. This is based on the assumption inflation averages 3% per annum during this timeframe, and the monthly contribution is increased at the same rate to keep up with the general rising level of prices. In this example, I’m also assuming the saver starts with a full ISA of £20,000 as a solid base.

Without that base to start saving from, it’s still possible to make a million with £250 a month, it will just take a little longer. Indeed, according to my calculations, it will take over 34 years of saving £250 a month, rising with inflation, at an average annual return of 10% to make that golden number.

The bottom line

So that’s how I plan to make a million in my ISA by saving just £250 a month. As I’ve tried to explain above, you don’t need to be a financial genius to make this return. All you need is a simple, low-cost FTSE 250 tracker fund… and time.

As long as you are saving enough and resist the temptation to tinker with the portfolio, over the long term, your money should look after itself and grow into a sizable pension pot, which will allow you to retire in comfort.

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Rupert Hargreaves owns no share mentioned. 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.