It’s a fact of life — and especially in investing — that there’s always a pay-off between time and money. But today I’ll show you the exact calculations you need to become a Stocks and Shares ISA millionaire.
With an initial investment of just £3,000, anyone can do it with the right rate of return.
At a very achievable 10% rate of return per year, you can turn a few grand into a million quid. With some outstanding performers, 10% may start to look like a very conservative number indeed.
So what’s the calculation, and how do you get there?
Building a Stocks and Shares ISA from decent to outstanding only requires one thing.
It’s one of the hardest things to do. It’s all very well dumping a wad of cash into your Stocks and Shares ISA just once. But if that doesn’t happen every month, you lose out on the real benefits of consistent investing.
When you do this, you get a huge investing advantage: pound cost averaging.
This means buying via your Stocks and Shares ISA when the market rates companies highly, and also when it rates them less well. It means at some points in the year you’ll get better value from buying shares at a relatively low price. And this will even out any points when you pay a relatively higher price for your shares.
In general it’s just a cleverer way to buy shares than all at once.
A £1m Stocks and Shares ISA
With £3,000 to start, adding £333 per month at a 10% rate of return will get you to the £1m threshold in 33 years. So if you’ve just turned 40, that means a few years after you retire, you’ll hit a seven-figure Stocks and Shares ISA.
You might think that by having a much larger starting amount, it’s much faster to create a £1m Stocks and Shares ISA. But that’s not strictly true. This demonstrates the power of regular investing.
Take for example a hefty £12,000 lump sum, and our original amounts of an extra £333 a month at 10% annual return. How much quicker do we reach the magic figure?
Only two years earlier.
If you’re shorter on time, a better option is to raise your regular monthly amounts.
It’s less of a burden for most of us to scrape together an extra couple of hundred pounds a month than it is to suddenly find £8k or £10k in one go.
With a £3,000 lump sum, a 10% rate of return and £633 a month, for example, you’ll reach £1,000,000 in your Stocks and Shares ISA in 27 years.
That’s six full years sooner than with £333 a month. If you have a couple of good years and your rate of return averages out a little higher, you’ll shave a few more years off too.
Making a million
A UK Stocks and Shares ISA has a maximum allowable limit of £20,000 per year. Breaking that down across 12 months gives us a maximum per-month allowance of £1,666.66.
I don’t know many people who can afford to put multiple thousands of pounds into their retirement fund every month, but if you can, great. I would start today and never look back.
Many investors are only interested in short-term gains. But if you can set a plan and stick to it long term? That’s where real wealth comes from.
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TomRodgers 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.