Posted in:

How to become an ISA millionaire

For a lot of people, the idea of having an ISA worth £1 million might seem like a long shot. After all, you need to invest heavily and consistently for a couple of decades to reach this milestone.

How to become an ISA millionaire?Make full use of ISA allowance consistently
Which type of ISA account is recommended to achieve an ISA worth £1 million?A stocks and shares ISA
How can you achieve an ISA worth £1 million?Through long-term investments
What to abstain from to achieve a £1 million ISA?Do not make withdrawals

As inflation falls, making savings and investing more accessible, the million-pound mark becomes increasingly achievable for long-term savers. This means that, for the next generation of investors, becoming an ISA millionaire will be far easier than it was for their parents or grandparents. So, how could you become an ISA millionaire?

Put your money to work

The first and most important tip is that you need to be putting your money to work. With the current inflation rate at 4.0%, merely holding your money in cash may not be the best strategy for significant long-term growth. The presence of inflation, even at this lower rate, coupled with modest interest rates, can still lead to a gradual decrease in the real value of cash savings over time.

For your ISA to hit the £1 million mark, you need to invest the full £20,000 ISA allowance for approximately 26 years with an annual growth rate of 5%. If you can find 7% returns, this timeframe drops to approximately 23 years. There are simply no cash accounts that offer interest rates anywhere close to these figures, so you need to consider your options.

A stocks and shares ISA is our recommendation. Of course, with investing, your money can go down as well as up, and you may get back less than you put in. However, if you’re aiming for significant enough returns, financial markets may be your best bet.

Take a long-term approach

When we talk about becoming an ISA millionaire, we don’t mean to suggest that it can happen overnight. On the contrary, building any significant stocks and shares portfolio is best done over a long timeframe and with careful planning.

Avoid any kind of ‘get rich quick’ scheme or speculative trading. You can lose money with any investments, and backing the wrong horse on a speculative trading strategy can be disastrous. This extends to particularly volatile assets like cryptocurrencies or NFTs – people have made and lost a lot of money trading them, but we wouldn’t see them as part of any long-term strategy.

So, if you want to know how to become an ISA millionaire or simply grow a healthy portfolio for the future, it’s important to take a long-term approach at all times and avoid being drawn into speculative trading.

Maximise your contributions

To become an ISA millionaire, you need to invest a lot, and you need to invest consistently. To get to a pot of £1 million in under, say, 30 years, you’d need to be investing (at least close to) the entire £20,000 ISA allowance every tax year. This is a level of saving that will be unachievable for a lot of people.

Having said that, maximising your ISA contributions is also a great way to use any lump sums you come into over the course of your life. Say you inherit £300,000. You could sit on it and have a very healthy retirement pot. Alternatively, you could invest it at a rate of £20,000 a year and take full advantage of the tax and potential growth benefits of an ISA.

There’s no rush to become an ISA millionaire and, ultimately, no failure in falling short of that milestone. With regular investing, anyone can develop a healthy pot of savings to draw from later down the line. Maximising your contributions means investing what you can based on your financial situation.

Don’t stress about the milestone

Finally, it’s important to avoid fixating on the milestone of ‘millionaire’. Anyone who creates and sticks to a long-term investment strategy is looking after themselves and their money and will be all the better for it.

Not many people can put away £20,000 a year, every year. You might only be able to put away £5,000 or less annually. This will still build to a very healthy pot over time. However, the key is consistency – speak to a consultant who can help you put together a plan that fits with your long-term goals and your financial situation.

Oh, and don’t be tempted to withdraw your returns. These returns are vital to the phenomenon of compound interest. We recently produced a video explaining what that is and how important it can be for the value of your long-term investments. Watch it here.

The importance of financial planning

You won’t become an ISA millionaire without some careful financial planning. Without it, you might have to commit the cardinal sin of having to withdraw your returns to pay for unplanned events. No one is exempt from falling foul of unexpected events that need money to cover them. The more well-off you are financially, the higher these unforeseen costs can be.

The place to start is by creating a budget. This budget needs to include all of your regular expenses and expected income. Only by establishing a budget can you accurately determine the amount of disposable income remaining once all expenses have been accounted for.

Firstly, before you earmark any surplus for investing, you should create an emergency fund, even if you are relatively wealthy. Regard your emergency fund as a short-term investment. It’s there to be tapped into when necessary, and the most popular vehicle for this type of short-term saving is an easy or instant-access savings account.

Once you tap into the fund, you should top it up again, or it will surely dwindle away. This, too, should be a feature of the budget plan you create.

Having a healthy emergency fund means that you can safely invest the rest of your income in, say, a stocks and shares ISA as a long-term investment. By keeping all returns inside the tax wrapper, compound interest can get to work and help you along the road to one day becoming an ISA millionaire or at least being very comfortably positioned when retirement finally comes around.

FAQ

Is it possible to be an ISA millionaire?

Yes, it is possible to become an ISA millionaire. According to data released by HMRC, there are 4,000 ISA millionaires currently in the UK.

How can I become an ISA millionaire?

To become an ISA millionaire, you have to maximise your ISA allowance; the more money you invest, the more your money will grow. Invest in the stock market instead of cash, as the stock market has better returns. Continually reinvest your dividends to boost your potential earnings. Discipline, patience and consistency are required to ride out market volatility. Diversifying your investments is key to being an ISA millionaire. Invest in an investment trust, equity, unit trust, ETP, gilts, and bonds.

How long does it take to become an ISA millionaire?

It could take decades to become an ISA millionaire if you invest the maximum ISA allowance each year with a 5 – 7% annual growth. The average ISA millionaire age is between 69 and 71, but that does not mean there are no ISA millionaires in their 30s. The youngest ISA millionaire is 35.

Did you find this content interesting?

You already voted!

*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.