One million pounds sitting in your bank account – who wouldn’t want that? Just think of the lifestyle you could live with that kind of money…
It’s the desire for this kind of life-changing wealth that makes the National Lottery and NS&I Premium Bonds so popular in the UK. The former offers the chance to win many millions in cash prizes multiple times a week, while the latter offers bondholders the chance to win a million every month. As a result, around 70% of people over the age of 18 in the UK buy a National Lottery ticket on a regular basis, while 40% of the population owns Premium Bonds.
However, when you crunch the numbers, it quickly becomes clear that in reality, those playing the National Lottery or investing in Premium Bonds are unlikely to win a million pounds.
Wasting your money
With the Lottery, the odds of winning the jackpot are 1 in 45,057,474 (the human brain is not wired to process those kinds of odds but I’ll give you a tip – the odds of winning are NOT good). Meanwhile, the odds of winning the major £1m prize with Premium Bonds is a staggering 1 in 40bn per bond (that makes the National Lottery odds look good, which says how poor the odds are).
The takeaway here is that while both the National Lottery and NS&I Premium Bonds do offer the chance to win a life-changing amount of money, in reality, it’s very unlikely that you will win a major prize and pocket a million. The harsh truth is that you’re wasting your money.
An easier way to make a million
In my view, if your financial goal is one million pounds (or any figure for that matter), a much more sensible approach to building wealth is investing in the stock market.
The reason I say this is that the stock market is a proven wealth generator. Due to the fact that the stock market tends to rise over the long run, stocks have turned hundreds of thousands of people around the world into millionaires over the years, and there’s no reason to believe that this won’t continue to happen in the future.
Just look at the long-term performance of the stock market. Since the FTSE 100’s inception in 1984, it has risen from 1,000 points to nearly 7,300 points, which means that when you include dividends, it has provided a total return of around 9% per year. Meanwhile, the US’s S&P 500 index has performed even better than this. Since 1926, it has delivered a return of around 10% per year.
Past performance is no guarantee of future performance, of course. However, as an example, if you were to invest £5,000 per year into the stock market and you generated a return of 9% on your money every year, your portfolio would be worth one million pounds in 35 years. Double your investment to £10,000 per year and you’d hit one million in just 27 years.
It’s these kinds of simple calculations that lead me to believe that stock market investing is one of the best ways to create wealth. Stocks won’t make you rich overnight. However, unlike the National Lottery and NS&I Premium Bonds, the odds of generating life-changing wealth are in your favour if you invest for the long term.
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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.