Plans to make a million by saving £250 per month in a savings account could lead to disappointment. After all, savings rates are currently low, and are likely to remain at a low ebb for a number of years.
By contrast, many UK shares currently trade at low prices that suggest they offer high return prospects in a likely stock market recovery. Through buying a diverse range of them over time, it may be possible to build a seven-figure portfolio within an investor’s working lifetime.
Holding cash to make a million
With interest rates currently near zero, cash is unlikely to be a path to make a million for many people. For example, even assuming a saver can obtain a 1% interest rate on their cash, it would take around 147 years for a £250 monthly investment to be worth in excess of £1m. Clearly, it is an unrealistic option for anyone!
Of course, this assumes that interest rates will not rise in that time. History suggests that they will. However, the pace at which they increase could be relatively slow. Policymakers may be wary of holding back economic growth after what has been an exceptionally challenging period. This may even mean that interest rates lag inflation. In such a situation, an individual’s spending power could decrease and their prospects to make a million could fade so that they are unable to achieve the level of financial freedom they had hoped for.
Investing money in shares to make £1m
Investing in shares is likely to be a more effective means to make a million. The stock market has a long track record of generating high returns. Even though the FTSE 100 still trades lower now than it did at the start of 2020, it has still been able to produce annualised total returns of around 8% since its inception in 1984. Assuming the same rate of return on a £250 monthly investment would lead to a portfolio valued at £1m within 42 years. As such, it is a far more realistic means of obtaining a seven-figure portfolio.
Of course, many UK shares currently offer good value for money after the 2020 stock market crash. This means that they may offer return potential that is higher than the wider market. For example, banking stocks such as Lloyds and Barclays trade significantly lower than their net asset values, while retailers such as Sainsbury’s and Morrisons may offer good value for money ahead of a likely shift towards online grocery retailing.
As such, buying a selection of undervalued UK shares now could increase an investor’s chances to make a million. Certainly, that process is likely to take many years. But, through having a diverse portfolio of shares, it could come much quicker than would be the case from holding cash in a low-interest savings account.
Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. 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.