I’d drip-feed £417 a month into a Stocks and Shares ISA to try for a million

By 2021, there will be more than 2,000 ISA millionaires in the UK. So everyone has made £1,000,000 through an account that has a maximum deposit of £20,0000 per year.

If it was just to save that money, it would mean that a 20-year-old would have to deposit £20,000 a year until he was 70.

But if I can do maths, I can get all the way to a million pounds with only £5,000 a year (£417 a month) and in less than 50 years. But it will only work if I use one specific type of ISA.

What type of ISA?

I would put good money on at least 2,000 ISA millionaires using the Stocks and Shares ISA to build wealth. The reason is that this type of ISA offers the highest potential with 8-10% as a typical annual stock market return over a long period of time. Investing in stocks is risk-free, and there are no guaranteed returns.

Another popular type of ISA is the Cash ISA. It is very safe but with low returns associated with the interest rate, which is 4% currently. Let’s run the numbers and see how they compare.

Drip-feeding £417

Let’s say I’m starting from scratch and want to hit a million in my Stocks and Shares ISA. I want to save £5,000 a year by nursing £417 a month.

What kind of percentage return can I expect? Well, that’s it FTSE 100 – a collection of the 100 largest companies listed in London Stock Exchange – has a historical annual return of around 8%. At FTSE 250 – the 101st to 350th largest company – yields around 10%. Let’s assume a 9% annual return.

It is clear from the table just how much investing in stocks can increase returns, especially in the long term as compound interest works its magic. And it looks like I have the potential to join the ISA millionaires club after 34 years. Now, what if I want to reduce that time?

How to increase returns

One way to increase returns is to invest in individual stocks. For example, if I invest in Amazon in 2005 I have netted a 5,000% return so far – 50 times the return on my stock. Compare that to the FTSE 100, which is up 60% over the same period. That can get me to a million much faster.

Of course, a company can go bankrupt or have a lean period. I think the best philosophy is a balance of carefully selected stocks while staying diversified across different companies and sectors.

Try for a million?

In fact, I am not focused on making millions just for the sake of it. But I think it’s a fun exercise in showing why investing in stocks and shares is a powerful way to build long-term wealth.

And with the tax benefits of the Stocks and Shares ISA? I’m very happy to drip-feed my regular savings to do that.

Please note that tax treatment depends on the individual circumstances of each client and may change in the future. The content in this article is provided for informational purposes only. It is not intended to be, nor does it become, any form of tax advice. Readers are responsible for conducting their own due diligence and seeking professional advice before making any investment decisions.