It’s easy to fritter money away, but I would rather put it to work by investing small, regular sums in a Stocks and Shares ISA. Over time, putting away a pound or two every day can build up into something worth having.
By stretching that to £10 a day, roughly the price of a morning coffee and lunchtime meal deal, I can start to build serious money for retirement.
Stocks and Shares ISA millionaires do exist
Drip-feeding monthly sums into FTSE 100 shares strikes me as an attractive way to build a large pot of personal wealth. If I generate a return roughly in line with the FTSE 100 long-term average of 7% a year, my £10 a day could eventually be worth hundreds of thousands of pounds.
That is all due to the power of compound interest. By re-investing all the dividends I receive straight back into my portfolio, I would turbocharge my total return. If I started young, say age 25, my £10 a day would have grown to £779,675 some 40 years on, when I’d be 65. That money would also be free of all income tax and capital gains tax.
I would have made total contributions of £146,000, while compound interest would have delivered a staggering £633,675 of my ultimate total.
That would leave me short of a million, which is why I would take a second step. I would increase my contribution by 3% every year, to help it keep pace with inflation. If I did that, I would have a portfolio of £1.14m after 40 years.
Now 40 years is a long time. Sadly, I’m much closer to retirement than that. An investor who was 20 years away from hanging up their boots and invested just £10 a day would only build savings of £201,482, assuming the same 7% return. It pays to start early and stick with it.
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With luck, they may have other sources of retirement savings, such as a workplace pension. But late starters will have to work harder if they want to make a million.
That’s easier said than done, especially as money is so tight these days. But one way I would aim to generate a better return is to invest in individual FTSE 100 stocks.
This is riskier than simply purchasing a FTSE 100 tracker, but I would combat that by building a portfolio of around a dozen companies in different sectors and with contrasting risk profiles. That way if one or two disappoint, others will hopefully outperform.
With luck and careful research I would hope to generate a return of more than 7% a year, but as ever with investing, there are no guarantees. If I managed to up my average annual return to 10%, my £10 a day would turn into £1 million in 32 years, instead of 40. Again, this assumes I increase my contribution by 3% a year.
The truth is that most of us will not become a Stocks and Shares ISA millionaire. Yet that’s only a dream target figure. Even if I generated, say, half that amount, I could still look forward to a more comfortable retirement than if I had never tried.
The post I’d invest £10 a day in a Stocks and Shares ISA to try for a million appeared first on The Motley Fool UK.
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Harvey Jones doesn’t hold any of the shares mentioned in this article. 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.