ISAs can be fantastic wealth-building tools. With these tax-efficient accounts, it’s possible for me to build up a substantial amount of money over time, even when starting with a fairly modest sum of money.
Here’s how I’d aim to turn a modest ISA into £500k using this time-honoured savings hack.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
First thing’s first
Let’s assume I was starting out investing with £10k today. The first thing I’d do is put this money into a Stocks and Shares ISA rather than a Cash ISA.
Doing so, I have instant access to a vast array of investments to help me grow my wealth much faster than cash. These include individual shares, investment funds and trusts, and exchange-traded funds (ETFs).
Through such investments, I could realistically aim to grow my wealth with average annual returns of 8-10% a year over the long term.
Of course, this would be an average return target. The stock market doesn’t go up every year, so there will naturally be ups and downs along the way.
This is why it’s important to start with the right long-term mindset.
That hack? Compound interest
Earning interest upon interest – compounding returns – is the most powerful wealth-building force available to investors, I believe.
Left alone to do its things, the compounding effect can lead to exponential growth in the value of an investment. Of course, it also works the other way with debt, which is why it’s far better to have this force working for rather than against us.
Now, let’s say I were to build an ISA portfolio of investments that collectively returned 9% a year on average. That starting £10,000 compounded over 30 years would hypothetically become £132,676 (excluding any platform fees).
That’s without me adding a single penny more!
A potential compounder
So, what type of shares would I buy to start building a diversified ISA portfolio?
Well, one that I rate highly and own myself is Legal & General (LSE: LGEN). Founded in 1836, this FTSE 100 company provides insurance, investment management, and retirement solutions.
These are highly specialised areas, especially insurance where risk assessment can be very difficult to get right consistently.
Legal & General’s proven track record of successfully underwriting policies and managing assets has enabled it to raise its annual dividend over many decades. It even held its payout steady during the pandemic.
Year
Dividend per share
2024 (forecast)
21.4p
2023 (forecast)
20.3p
2022
19.4p
2021
18.5p
2020
17.6p
2019
17.6p
2018
16.4p
2008
4.0p
1998
3.3p
At today’s share price, the forward dividend yield for 2024 is a very juicy 8.8%. That means a £5k investment could generate me a welcome £440 in dividends. Then potentially more in future.
Having said that, it’s worth noting that dividends aren’t guaranteed. Furthermore, the company has a new chief executive and we’re yet to hear his plans and strategy.
I’m optimistic about the company’s long-term growth prospects as the population ages. But the market might not share my enthusiasm if the CEO’s vision stirs uncertainty. This could cause near-term volatility.
Aiming for £500k
The real compounding hack is when fuel is added to the fire through regular contributions. Therefore, I’d try to invest as much money as possible, building on that original sum.
If I invested a further £10k a year, while still generating a 9% return, I’d hopefully get to the £500k mark in just under 19 years. It could take just under 26 years to reach a million — or sooner with higher contributions.
The post How to try and turn a small ISA into £500k with this savings hack appeared first on The Motley Fool UK.
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Ben McPoland has positions in Legal & General Group Plc. 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.
