Making a million and retiring early, that's the dream. Unfortunately, few investors and savers ever reach this critical milestone thanks to a few major mistakes they make throughout their financial life.
Saving is the easy part
Saving for the future isn't difficult. As long as you make sure you put away a set amount every month, soon your wealth will build up, and as long as your savings plan remains consistent, that £1m target will eventually be in sight.
However, many savers aren't making full use of the tools available to them to boost their savings and get there faster. There's currently billions of pounds languishing in low-interest savings accounts around the UK as many savers are just not taking advantage of products to wake up their money. With that in mind, here are three tips to help you wake it up and retire with a seven-figure sum.
Start with the easy part
If you want to retire with a million, the first place to start is saving. You need a consistent, regular savings plan to be able to build wealth over time. Saving £50 a month is a good place to start.
But saving isn't enough in itself. You need to make sure your money is working for you by spending some time seeking out the best savings rates. Fixed interest accounts and regular savings accounts generally offer more in the way of interest than current accounts and have the added bonus of preventing you from getting to your money for a set period. With the funds locked away, the chances of you raiding your savings are greatly reduced.
Invest for the long term
But you need to make your money work even harder and investing in equities is another way to wake up your money. The best way to do this is inside an ISA wrapper.
An ISA wrapper shields income and capital gains made within the ISA from the taxman. Specifically, there's no need to declare any income or capital gains made within the ISA to HMRC. This makes ISAs the single best product to use to grow your wealth. Owning shares within an ISA will generate much larger returns over time than just a plain cash ISA. For example, the best cash ISA rate today is 1.6%, while the FTSE 100 currently yields 3.5%.
ISAs and savings tax allowances bring me onto my next tip to helping you build wealth.
Make the most of your allowances
Making the most of your tax allowances is a vital part of savings that many savers fail to acknowledge. Making the most out of the ISA wrapper can be highly lucrative over the long term. For example, fund house Fidelity has calculated that if you fill a £15.2k ISA every year, and achieve a return of 5% per annum, it will only take 28 years to reach a million.
So overall, getting to the £1m benchmark will take time, but by using the above tips, it might not take as long as you think.
Make money, not mistakes
A recent study conducted by financial research firm DALBAR found that the average investor realised an annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually thanks to poor investment decisions.
To help you streamline your investment process, realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.