When you start investing, the thought of becoming an ISA millionaire sounds outlandish. Surely it isn’t possible by plodding along and picking stocks from the FTSE 100 and FTSE 250?
To retire as a millionaire, some say you’ll need to invest in the ‘next big thing’. Look at all of those people who made their fortunes from the Bitcoin surge in 2017. Or the early investors in Apple or Amazon who have retained their holdings.
They might say that to invest in something boring won’t make you a millionaire. I disagree.
What Warren Buffett says
As a fan of Warren Buffett’s investing principles, my number one rule is to not lose money. I’ve come to realise that if investing seems exciting, I’m probably doing something wrong.
Generally, the ‘next big thing’ has too many unknown quantities for me to part with my money. I’d rather invest in an established business, which has a history of revenue growth and low amounts of debt. The two main indices in the UK have a multitude of these types of companies.
The good news is that you can become an ISA millionaire even with only small amounts.
If you start investing at 20 years old with a lump sum of £1,000 and average returns of 8% a year, you would only need to invest £220 a month to reach £1m when you’re 65 (actually £1,095,991.68… consider it a bonus).
The thing we have on our side is the power of compound interest: literally when your investment earns interest on its interest, building up and snowballing over time.
Given a long period of time, compound interest is a powerful beast. It’s why investors like Warren Buffett avoid losing money at all costs, and steer clear of get-rich-quick investments.
In our earlier example, over the 45-year period, you would have made contributions of £119,000. The rest (£976,191) is interest.
Although compound interest is working in our favour, there is a force working against us — time. Warren Buffett knew this, and made his first investment when he was just 11 years old.
Using our example, if you started investing the same amount, got the same returns, but started at 30 years-old, when it comes to retiring you’ll have just under £500,000. Increasing the monthly payment to £500 would get you back over the £1m mark.
Starting at 40 years-old would get you a just over £200,000 when you hit 65. You’ll need to be saving roughly £1,100 a month to hit £1m by the time you retire.
Coincidentally, if you started out at 11 years-old, like Buffett, a fairly low £100 regular monthly payment would have seen you over the £1m finishing line when you reach 65. Staggeringly, almost all of the £1m would be gained from interest. Less than £70,000 of this would be down to your own contributions.
It is entirely possible to reach £1m through an ISA. All you need is some time, regular monthly payments and an average return on your investment. The rest is down to compound interest.
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T Sligo has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Apple. 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.