Image source: Getty Images
Many people dream of retiring with a seven-figure investment pot. It might be more achievable than it sounds. By consistently investing just 10% of a salary into a Stocks and Shares ISA, the power of compounding can turn sustainable contributions into something far greater over the long run.
Let’s assume a worker earns the UK’s average salary of around £35,000. Setting aside 10% means investing £3,500 each year, or just under £300 per month. Placed into a tax-efficient ISA and invested in a diversified portfolio of shares, that money could grow substantially.
The variables
Historically, the FTSE All-Share has delivered annualised returns of around 7% once dividends are reinvested. Using this rate as a guide, £3,500 invested each year for 35 years could grow to over £500,000. That’s impressive, but it falls short of the £1m milestone.
However, the calculation changes if income rises over time. A 3% annual pay rise means contributions grow each year as well. This time, with an 8% return assumption, the ISA would be worth over £1m after 36 years. This shows that small, incremental increases in contributions — simply by following salary growth — can make a huge difference.
It’s important to stress that returns aren’t guaranteed. Markets fluctuate, and there will inevitably be downturns along the way. But history shows that patient, long-term investors who reinvest dividends have often been rewarded.
Getting started
One way to get started is by setting up a direct debit into a UK brokerage account that allows investing in a range of stocks, bonds, trusts, and funds. This removes the temptation to time the market and ensures discipline. As earnings increase, the 10% allocation can be scaled up automatically.
For many, becoming an ISA millionaire is not about luck or extraordinary stock picking ability. It’s about consistency, patience, and allowing compounding to work quietly in the background. By committing just a fraction of salary each month, the dream of a £1m portfolio could be surprisingly attainable.
Investing wisely
Picking up ‘bargain’ stocks isn’t always the best idea, because sometimes there’s a reason they’re cheap. However, one stock that I believe is genuinely undervalued is Jet2 (LSE:JET2).
Jet2 is UK’s largest tour operator. Its stock slumped this week after the company said that earnings for the year would likely come in at the bottom end of guidance. That’s partially because of late booking patterns that have negatively impacted the company’s visibility. In turn, Jet2 is reducing its available capacity for the winter months.
Despite this, the stock looks incredibly cheap. Shares are trading around 6.5 times forward earnings, but the enterprise value-to-EBITDA ratio (enterprise value accounts for net cash) is significantly below one, far cheaper than any of its peers. With modest earnings growth expecting in the coming years, coupled with long-term fleet expansion, I think this is certainly a stock worth considering.
Investors, however, should recognise the impact of higher national insurance and wage costs. The Budget has hit many companies hard, big and small.
