The Motley Fool

Want to retire with £1 million? Here are 3 smart steps to help you do it

You don’t have to be a director of one of the UK’s largest public limited companies in the FTSE 100 to make a million. Although if you were, you’d be paid a million in less than a year, probably!

You don’t even have to be a doctor, lawyer, dentist, architect, accountant, middle manager or any other high-earning individual in one of the professions.

Step 1:  Save consistently

I reckon it’s within the grasp of most people to accumulate a million pounds within their working lifetimes, even when earning an average salary, such as those paid to electricians, plumbers, builders, administrators, factory operatives and those forming the ranks of public organisations such as local government, the NHS and others. In short, I reckon a million pounds is within the grasp of most working people in the UK today.

But you’ve got to take some action. The first step is to save money and save it consistently. That means setting aside regular payments to your savings – once a month would be ideal – and treating the expense of saving as sacrosanct. You will need to live below your means to do it, but the prize at the end is worth it.

Step 2:  Pick the right vehicle to invest in

Once you are saving money, you need to make those savings work as hard for you as they possibly can. So it’s no good sticking the money in a cash savings account such as a Cash ISA because the interest rates it will pay you are derisory. That means the spending power of your saved money will likely fail to keep up with inflation – you won’t get rich that way.

Instead, I suggest that you invest the money in shares or share-backed funds. Over the long haul, shares have been proved to outperform all other major classes of assets such as bonds, cash savings and property. Indeed, underlying every share is a business with the potential to increase its earnings and assets, which will reflect in returns to shareholders via dividend payments and capital appreciation when share prices rise.

So I’d pay my monthly savings into a tax-efficient account such as a Workplace Pension, Personal Pension, Self-Invested Personal Pension or a Stocks and Shares ISA and invest regularly within that account in tracker funds, managed funds, or individual shares.

Step 3:  Compound

The process of compounding is key to generating life-changing amounts of money from your savings. In a cash savings account, compounding happens when the interest earns more interest and so on – the interest is automatically ploughed back in.

Compounding is exciting because it works exponentially. In other words, the gains get bigger and bigger as time passes. You can achieve compounding with shares and share-backed investments by ploughing the dividends you receive back into your investments and recycling your capital back into shares if and when you sell any of them.

You Really Could Make A Million

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Kevin Godbold has no position in any 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.