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Here’s my simple 3-step plan to build a £1 million ISA

Most people would love to own a million pound ISA portfolio and be able to retire without having to worry about money. However, in reality, a lot of people give up on this dream before they even start, simply because they believe they’ll be facing an uphill battle to generate this kind of wealth.

Yet with the right strategy, a £1m ISA portfolio is certainly achievable, even if you’re not on a high salary. In this article, I’ll explain my own simple three-step ISA millionaire strategy which I’m convinced can get me to the magical £1m mark in time.

Step 1. Opening the right ISA

The first step in my ISA millionaire strategy involves putting money into the right ISAs. Here, I’ve ignored the Cash ISA and I’ve opened both a Stocks and Shares ISA and a Lifetime ISA.

The advantage of these ISAs is that, unlike the Cash ISA, they enable me to hold a wide range of growth assets such as shares and funds. These kinds of assets are likely to get me to the £1m mark way faster than cash savings simply because their returns are so much higher over the long run.

The Lifetime ISA also comes with 25% bonuses from the government on contributions up to £4,000 per year, which will help me turbocharge my savings even more.

Step 2. Regular contributions

The second step in my ISA millionaire plan involves contributing as much money as I can each month into my ISAs. Here, I prioritise the Lifetime ISA and max out the £4,000 yearly allowance as early as I can each year in order to pick up the bonus £1,000 and put that money to work.

I don’t expect to be able to use up the overall £20,000 ISA allowance every year. However, I figure that if I can save 10% to 20% of my income every month, I’ll be regularly getting closer to the £1m mark.

Step 3. Choosing the right assets

The third and final step involves choosing the right mix of assets to grow my money over time. Here, I’ve put approximately 70% of my money into FTSE 100 dividend stocks and the remaining 30% in growth investments. 

The dividend stocks provide me with regular dividend income which I can reinvest to compound my wealth, and they also provide me with a degree of security. Overall, I’m aiming for returns of around 7% to 8% per year from this part of the portfolio, with over half of that return coming from the dividend income. By contrast, the growth section of the portfolio, which is a mix of global growth funds (Fundsmith, Lindsell Train etc.) and smaller growth companies, is designed to generate higher returns of around 10% to 15% per year.

Overall, this strategy is designed to generate a return of 9%+ per year without taking on too much risk. Running the maths, £100 invested every week and growing at 9% per year grows to £1m in 34 years, while £200 invested every week and growing at 9% per year hits one million in just 27 years.

So, as you can see, building a £1m ISA portfolio is certainly achievable. The right ISA, regular savings, and an effective asset allocation is all it takes.

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Edward Sheldon has a position in the Fundsmith Equity fund and the Lindsell Train Global Equity fund. 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.