If you want to make a million, you need to dump your Cash ISA. They used to be a great way to save for the future, but with interest rates where they are today, these tax-free wrappers will hold you back on your journey to £1m.
Indeed, at the time of writing, the best easy access Cash ISA rate on the market is just 1.46%, which is below inflation. So, instead of letting your money languish in this low-interest account, I highly recommend investing your money in the stock market.
Investing for the future
If you’re serious about growing your wealth, you should be investing in the stock market. Research shows that over the past 100 years, stocks have outperformed cash by around 5% per annum.
I think the best way to illustrate the impact low rates can have on your wealth is to look at the numbers. It would take 261 years to make £1m with £20,000 invested at an interest rate of 1.5% per annum. By comparison, the same £20,000 invested in the stock market would hit this target in 61 years, assuming an average annual rate of return of 6.5%.
If you’re willing to take on a bit more risk, it’s possible to hit this target in a shorter time frame.
Over the past decade, the FTSE 100 has generated an average annual return for investors in the region of 9%. At that rate, it would only take 44 years for £20,000 to grow into £1m — assuming no money is added along the way.
An additional contribution of just £100 a month would reduce the time it takes to hit this landmark figure by five years.
Buy and forget
Personally, if I had a £20,000 lump sum to invest today, I’d use a combination of funds.
A FTSE 250 tracker fund would be in the mix as well as a UK Equity Income passive fund. Vanguard’s FTSE UK Equity Income Index Fund, which currently supports a dividend yield of 5.4%, is one option here. The fund tracks the performance of the FTSE UK Equity Income Index and only charges 0.22% per annum in fees.
I think these two funds offer the perfect combination of growth and income. I might also be tempted to add in a fund that tracks the performance of small- or mid-cap growth stocks. This could potentially offer higher returns, although it would come with an increased level of risk.
The bottom line
According to my calculations, the combination of a FTSE 250 tracker and UK Equity Income fund would give investors an annual return in the region of 8%.
At this rate of return, my figures show it would take 50 years to turn a £20,000 investment into £1m. That might seem like a long time but, with passive tracker funds, all you need to do is click ‘buy’, sit back, and relax. So what are you waiting for?
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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.