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I opened my first Stocks and Shares ISA last year, aged 27.
According to my financial guru, I should have saved one year’s salary to 30 if I wanted to retire with a luxurious nest egg.
It’s safe to say that I haven’t hit that target yet. And I’m not alone: in fact, 40% of adults under 30 have zilch saved up.
But by saving just £10 a day, my calculations show I could go from zero to retiring with £1m in the bank.
Choose the right vehicle
I will drip-feed that £10 a day into my Stocks and Shares ISA.
This type of account allows ordinary punters like me to buy shares in some of the finest companies in the world – like Apple, Microsoftand AstraZeneca. Historically, 8%-10% has been a typical annual stock market return each year. Of course, investing in the stock market is risky and future returns are not guaranteed.
An alternative would be a Cash ISA. The returns I see on this account are tied to the interest rate, which is 4% right now. The advantage here is that I will avoid the kind of volatility that is standard in the stock market.
Let’s run the numbers and watch how £10 a day can grow in these two types of accounts.
The power of compounding
Saving £10 a day can earn you £1m before you retire – even starting with nothing. However, I have to do it in a Stocks and Shares ISA.
At FTSE 100 – index of the 100 largest companies listed in London Stock Exchange – has a historical annual yield of about 8%. On the other hand, the FTSE 250 – the 101st to 350th largest company – yields around 10%. I took 9% annual return as the basis of my calculations.
As the table below shows, in the Stocks and Shares ISA, I can smash over the million pound mark when I reach 70, setting me up for a comfortable retirement.
| Year of investment | Cash ISA (3%) | Stocks and Shares ISA (9%) |
| 5 | £19,770 | £21,844 |
| 10 | £43,822 | £55,454 |
| 20 | £108,690 | £186,734 |
| 30 | £204,710 | £497,523 |
| 40 | £346,843 | £1,233,271 |
However, if I had been frugal but saved in a Cash ISA for 40 years, I would still be a long way from my target.
Depressingly, it will take 64 years before I reach £1m under the assumed 3% rate of return on the Cash ISA.
Extra push
If I want to reach the one million mark faster, I can try investing in individual stocks.
For example, if I have invested Alphabet in 2005 I have netted 2,000% returns so far. That beats the slow and steady FTSE 100, which is up 60% over the same period.
Of course, investing in individual stocks is safer, because I could easily choose a dud instead of a diamond and lose all my money.
Shooting for a million?
I’m not stressed about getting £1m in reality.
My philosophy is to actively invest cash in Stocks and Shares ISAs.
I’ll let the magic of compound interest do the rest.
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