If you’re new to investing, reaching those dizzying heights might seem like a pipe dream. But it’s surprisingly achievable with dedication, hard work and an awful lot of patience.
Time is a key factor in investing so building significant ISA wealth is much easier if you’re in your twenties or thirties.
Meanwhile, a 30-year-old could become a millionaire by investing £8,200 each year up to retirement age.
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The figures assume you invest in a stocks and shares ISA, achieve annual investment growth of 5 per cent and increase your contributions by 2 per cent each year in line with inflation.
“The sooner you start investing, the more you can harness the power of compounding returns, making it significantly easier to reach the coveted ISA millionaire status.
He adds: “Consistency is key – regular contributions, even modest ones, can snowball over the years into a substantial pot, especially with the generous tax benefits ISAs offer.”
Investment compounding can supercharge your wealth
Sarah Pennells, consumer finance expert at Royal London, said that “over the longer term, stocks and shares investments tend to deliver higher returns than cash, but returns are not guaranteed.
Over time, returns on your stocks and shares can start to snowball, through a process known as investment compounding.
Why use an ISA to invest?
The beauty of using an ISA to invest is that you can escape tax and keep more of your wealth, which is especially valuable as your wealth begins to grow.
Jobson explains that “it’s vital to invest inside an ISA wrapper because extra costs like tax can be a huge drag on performance, eroding your wealth over time.”
But time is running out to use this year’s £20,000 ISA allowance before it resets on 6 April.
“Anyone who’s aged 18 or over and resident in the UK can open an ISA, and you can save or invest up to £20,000, either putting it all in cash, all in stocks and shares, or splitting it.”
How to decide if using an ISA or savings account is better for you
With fixed accounts – where you lock away your cash for a set period of time – the interest is generally better on typical savings accounts than with ISAs.
At the moment, for example, the best two-year fixed ISA is with Cynergy Bank, paying 4.44 per cent, whereas with an easy access account you can get 4.76 per cent from Chip.
According to MoneySavingExpert.com, there is a method to help you compare normal savings accounts and cash ISAs, to decide which is better (assuming you will pay tax on your savings). Take the rate on the ISA you are looking at and multiply it by:
1.25 if you’re a basic-rate taxpayer 1.66 if you’re higher-rate taxpayer 1.82 if you’re a top-rate taxpayerThe result of that sum is the rate you need to get on a normal account for it to be a better option that your ISA. If normal savings don’t pay more than that, then you’re better off in the cash ISA.
As a result, for those who have not used their ISA allowance, the ISA is still a better bet than typical savings.
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