How a Stocks and Shares ISA could turn £1,000 per month into £1,000,000

When it comes to saving for retirement, there is no question in my mind. A Stocks and Shares ISA is a better way to build wealth than keeping money in cash.

Over the last 10 years, the FTSE 100 has yielded an average of 6% per year for investors. With a regular deposit of £1,000 a month, it is enough to make a person a millionaire after 30 years.

Compound interest

Investing £1,000 per month at 6% per annum yields a portfolio worth £1,010,000 after 30 years. It’s better than the best Cash ISA I can find at the moment, which pays 3% annual interest.

Someone who puts aside £1,000 a month and earns a 3% annual return for 30 years will have £585,000 at the end of the process. That’s a far cry from £1,010,000.

The difference doesn’t seem much after a year – a 3% return would return £13,196 and a 6% investment would cost £13,997. However, in the long run, the results are very different.

This is because of the power of compound interest. Every year, investors get a return not only from the money they saved, but also the returns of the previous years.

As a result, a person who earns 6% profit not only earns a higher annual profit than someone who invests at 3%. They also get a much larger return.

This is why I think the Stocks and Shares ISA is the right choice for people looking to build wealth. The difference in return really adds up over time.

Investment risk

However, it is important to note that the road to £1,000,000 in a Stocks and Shares ISA is unlikely to be smooth sailing. Stock market levels rise and fall, sometimes quite dramatically.

The FTSE 100 fell 11.5% in 1990 and 10% in 2000. Anyone who starts investing at the beginning of the year will be down by the end of the first year.

However, over time, even investors who started the year down for the index will finish well. To date, the FTSE 100 has never returned below 6% per annum on average for 25 years.

That’s why it’s important to have a long horizon when it comes to stocks. With the stock market, investing for longer gives you a better chance of return.

Investment risk

For those who want to use their cash in the next few years, the stock market will be risky. For example, the Cash ISA 3% return will be guaranteed, but the expected 6% from the Stocks and Shares ISA may fall short, not only in the short term but also in the long term. But historically, having a diversified stock portfolio has been a consistent way to build wealth.

I look to buy individual Shares in Stocks and Shares ISA with Yahoo to get even more returns. Whether I manage this or not, investing in the stock market puts me on the right track.