Who wants to be an ISA millionaire?

Becoming a millionaire is usually associated with winning the lottery or dreaming up an invention that takes the world by storm — and earns you a lot of money in the process. But there’s a third, more realistic way to become a millionaire, and it involves ISAs.

If you haven’t read my prior two blogs, I’d recommend checking them out before diving into this one. In the first, I explain what ISAs are and why they’re essential for experienced and novice savers alike to maximise their savings potential. And in the second, I explain the different flavours of ISA available, and how to decide which is right for you.

To finish my supermarket analogy on a hat-trick, this blog is for those aspiring to ditch Aldi for Waitrose — although that million might not last quite so long if you do!

How to become an ISA millionaire

To join over 4,000 Brits who’ve used the tax-free savings benefits of ISAs, in all their various forms, to accumulate over £1 million of savings, you’ll have to follow a relatively straightforward 4-step process.

Before I dive into this process, I’ll caveat by saying that ISAs don’t have the power to take you from rags to riches. Unsurprisingly, reaching the £1 million mark requires a decent amount of disposable income and the discipline to save over multiple decades. But for those that have the means, ISAs can help turn this dream into reality.

Now, onto that 4-step process I mentioned:

  1. Contribute consistently

The first step towards becoming an ISA millionaire is making the most of your £20,000 annual allowance. Not everyone has the means to deposit £20,000 a year into an ISA, but for once, time is on your side — even smaller contributions can lead to substantial results when compounded over decades.

But it’s not just how much you contribute that matters, it’s when. The interest or investment returns earned on ISAs is typically paid daily or monthly, so the sooner you can put your money to work, the better. This means that investing a £20,000 lump sum at the start of the tax year (6th April) should pay dividends (literally!), compared to drip feeding this cash throughout the year. That said, if you opt for a stocks and shares ISA, spreading your deposits into monthly payments, for example, could limit the risk of timing the market badly.

If you were a higher rate taxpayer lucky enough to contribute your full £20,000 allowance each tax year, assuming this money grew at an average annual rate of around 5%, you’d become an ISA millionaire in just 26 years! This is aided by tax savings of around £200,000.

2. Opt for a stocks and shares ISA

In my last blog, I delved into the different types of ISAs available, with the most common being cash ISAs. Although cash ISAs provide a safe way to steadily build your savings, they rarely offer the growth potential needed to reach millionaire status.

That said, the interest rates on offer on cash ISAs at the moment are very attractive. In fact, Zopa’s flexible, easy access cash ISA is currently offering more than the 5% AER you’ll need, as mentioned above! However, with interest rates expected to fall over the coming years, if ISA millionaire status is what you’re after, cash ISAs are unlikely to be the best place for your savings over the long term.

Stocks and shares ISAs, on the other hand, have historically outperformed cash savings accounts. And, bumping your average annual returns to 7% could help you shave 3 years off the time it takes to become an ISA millionaire. But with this additional earning potential comes the risk of market fluctuation, so you must have the stomach to weather this, and be comfortable in the knowledge that you might get back less than you put in.

If you do choose to opt for a stocks and shares ISA, it’s important you commit to staying invested. Investments will always rise and fall, and it can be tempting to jump ship when the tides turn against you, but holding your ground is almost always the better option. Leaving your money invested, and keeping any dividends invested too, allows your savings to benefit from compound interest over the long term — which is a crucial part of this process.

3. Diversify your investments

You know that good old saying, don’t put all your eggs in one basket? Well, it applies to investments too. It’s important to invest in a range of assets within your stocks and shares ISA, including equities, bonds and perhaps some alternative investments too. This will help to reduce your reliance on any given market, and hopefully result in more sustainable growth.

As well as diversifying your investments, it’s important to diversify your providers too, because your money will only be FSCS protected up to £85,000 with each one.

4. Transfer any savings to ISAs

As I mentioned in my first blog, every little helps when it comes to maximising your savings potential. So, if you have any savings sitting in non-tax-efficient accounts, consider switching them to an ISA. Although be mindful of making the most of your Personal Savings Allowance, because the earning potential on non-ISA accounts will often be higher.

The same applies to any lump sums you come into over the course of your life — such as inheritance or the sale of a property. Rather than sitting on this money, you could invest a portion of it each year into ISAs.

It’s not just a millionaire, it’s an ISA millionaire

I know you’re eager to get started on your journey to becoming an ISA millionaire, but before you go, remember, becoming an ISA millionaire doesn’t happen overnight — the average age of ISA millionaires is around 70. So, start early, stay disciplined and let the power of compounding work in your favour.

Disclaimer:

The views expressed are those of the author. This blog is intended for information only and doesn’t constitute financial advice. You should always do your own research to ensure anything you apply for is suitable for your specific circumstances.

Tax treatment depends on individual circumstances and may change. Interest rates are correct at the type of writing by may go up or down in the future. If you choose to invest, you may get back less than you put in.

†Smart Saver account and minimum £1 required. ISA Access pots 5.08% AER (4.96% gross) variable, payable monthly. Bonus 0.5% fixed applied until 6th April 2025, for new accounts opened by 5th April 2024. AER stands for 'annual equivalent rate'. We pay you interest on a monthly basis, but AER shows you the rate you’d get if this monthly interest was compounded and paid once a year instead. We provide an AER to make it easier for you to compare our rates with other providers.

Gross is the rate of interest we apply to your money, before any tax is taken off.

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