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Becoming an Isa millionaire may seem out of reach.
It is still a relatively exclusive club, with just a few thousand select investors having amassed a tax-free pot of cash worth more than £1 million.
Indeed, there are 25 Isa investors in Britain who have built up an average fortune of £11.6 million over 34 years, a recent Freedom of Information request from asset manager RBC Brewin Dolphin revealed.
Our reader has amassed more than £1million in his Isa pot in recent years – he shares his tips
Most have been investing since Isas was first introduced 25 years ago – and in Peps before that – making smart choices in choosing the right investments.
Our reader, Mr H – who wishes to remain anonymous – is one of the lucky but savvy few with an Isa worth more than £1 million.
Below he shares how he became an Isa millionaire and his top tips for growing your pot.
How do you become an Isa millionaire?
Mr H writes… It must be recognized that an Isa is only one part of a prudent approach to life/money management.
The reality is that anyone can improve their financial position by thinking long term. All you have to do is spend less than you earn and invest the excess wisely.
The ‘sensible’ part means avoiding certain losses, such as those from cash Isas.
These rarely protect against inflation, and usually only for short periods. And the compounding effect of below-inflation returns horribly erodes the value of savings.
A crucial cog is avoiding taxes, but not evading them; that’s where self-invested personal pensions and Isas come into the picture.
There are VCTs and EIS, but unless you’re really rich and knowledgeable, it’s probably best to skip these. And if you evade it, you will be fined or imprisoned.
Obviously, it helps to have a reasonably good income to fund savings. I suspect that many Isa millionaires generally had some form of side hustle to earn money from a young age, unless they were successfully self-employed or boosted by an inheritance.
I also suspect that most are sensible about general financial management and are likely to have a Sipp or other pension provision.
In fact, most research suggests that a Sipp will deliver a better outcome in the long term if equal amounts are committed, through the tax relief. This is even more true for a taxpayer with a higher rate.
There is a price to pay for this: the loss of flexibility.
Mr H has avoided ‘unnecessary’ luxury cars and expenses and has a 12 year old car
Financial prudence means making sure you can fund the full Isa benefit (probably second best after pension funding) and that’s where the ‘spend less’ part comes into play.
Some of my neighbors are working on their third or fourth kitchens and second or third bathrooms and have had a string of new cars. Why? They are not better fed, cleaner or more mobile than I am.
I think I have lived quite well, traveled extensively and pursued an interest in theater with hundreds of shows over the years, run sailboats and motorboats and given generously to godchildren, for whom I opened Sipps, not Isas, and charities.
I always challenge spending to ensure I get the best value for money. Not always the same as ‘cheapest’.
I’m baffled by the amounts of money people waste on things like replacement cars and the constant recycling of new kitchens, bathrooms, carpets, furniture and so on.
My car is 12 years old and will be replaced if/when it wears out. That’s unlikely in my lifetime as it has only 75,000 miles and has a 30 year corrosion warranty.
Am I driving on 88? Negotiable.
The last car started to wear out after 13 years and over 200,000 miles, during which time I had built up £2,000 a year towards its expected replacement.
I live in a neighborhood of houses that were built about 30 years ago and I have lived here for 28 years.
Some of my neighbors are working on their third or fourth kitchens and second or third bathrooms and have had a string of new cars. Why? They are not better fed, cleaner or more mobile than I am.
By the time Peps was merged with Isas my Pep was worth around £66,000.
I think this was a mediocre performance and certainly not helped by the failure of one investment in Atlantic Computers in 1990.
That risk always exists with individual companies, but you have to remember that if you invest (say) £10,000, at worst you could only lose £10,000.
In contrast, a similar amount invested in Dechra Pharmaceutical around 2005 yielded a payout of eighteen times the input. The upside is unlimited.
Halma has also been a ten-bagger, although if you invested in it in September 2021 you would have lost money on it.
Sometimes things get overrated and it’s time to get out… but it’s not easy to do that the right way.
EH tells potential investors to invest as much as possible in their stocks and shares Isa
My eight top tips
1. If you can, max.fund into stocks and shares Isa every year
Provided you have first thought about your pension position.
2. Build some savings outside of stocks and shares Isa
This is so that you don’t get caught in a sell-off when the market is not active. As you get older, you need more.
3. Don’t panic when the markets fall
This is a long game and they will come back – unless Putin starts using nuclear weapons or China gets into open conflict with the US… Your Isa will be the last thing you need to worry about. In both cases it would bother us so much that an Isa would be the last thing we would worry about.
4. Diversify by asset class and geography
It’s easy to be overweight in Britain because of a prejudice against one’s own country – and I’m guilty of that to some extent and I suspect it’s held me back.
5. Keep costs under control by paying them from outside the Isa
Why erode the money you put into a tax-free environment by paying the costs from within, when you can pay from without? This makes a big difference over time.
6. Don’t invest beyond your skills. If you have little knowledge, consider trackers
However, they now have a prominent place in the market and it is possible that they are creating bubbles by continuing to buy, which requires them to continue buying.
Be aware of the dangers. Some are deeply committed to technology, which while it has performed well so far, may not continue to do so indefinitely.
7. Don’t be a total skinflint
Before you spend money on something with no strings attached, ask yourself: Do you really need this? Balance this by doing the things you really want to do… and don’t be a slouch!
8. Educate yourself about financial matters
Read and educate yourself about financial matters. This makes me a better investor than I was 34 years ago. Or I think I am.
Only experienced investors…
In my opinion, it may be best to at least gain a little knowledge before you start and use actively managed Unit Trusts, selected from the top quartile of one, three, five year performers in their industry.
Data is available from many sources and Morningstar’s ratings are useful but not conclusive.
For a little more awareness, consider selective use of the often but not always better performing mutual funds, but make sure you understand the volatility impact of the bid/ask spreads.
Individual stocks carry high risk and are only better suited to experienced investors. They make up 15 percent of my total investments, and I know what I’m doing…. generally.
Finally, be aware of get-rich-quick schemes. If something sounds too good to be true and/or you’re under pressure to do something now, think twice. And on the third thought you walk away.
All of the above has worked for me. I’m an Isa millionaire, but with a little more than the average instead of the £11.6m of a megastar…
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