## Individual Savings Accounts (ISAs) are the key to becoming a millionaire

How a person or a couple can use their ISA allowances to build a pot of money worth over £1,000,000 and details as to how long this might take.

### Saving tax - the absolute basics

ISA refers to the UK's Individual Savings Account. It is a tax-free package for savings and investments. For the tax year 2016/17, UK residents have the option to invest £7,620 in a cash ISA and £7,620 in an  investment ISA. Alternatively, you could invest  £15,240 (or as much as possible) into an investment ISA. For the purposes of this post those outside of the UK will have to refer to any tax-free package that the government offers but the principles are still the same.

### Money Millionaire Theory

In theory it is very easy to become a millionaire, we will discuss the practicalities later on. To get the most out of this post it would be a good idea to download the free spreadsheet I have created by clicking on the picture opposite.

The (right) table assumes that you are one person saving to become a millionaire. You invest your full ISA investment limit (£15,240) into an index tracker, fund or share related product. You reinvest your full ISA allowance each year, topping up the total pot. I have assumed an annual rate of return of 7% per year. As you move down the last column you can see that the interest is compounded each year and you are topping up the amount invested in the third column. In the first column you will observe that it has taken you 25 years to become a millionaire and you have only actually invested £381,000 of your own money to reach this point, the rest is from the magic of compounding.

Theoretically, you could become a millionaire even quicker. If you were able to utilise the couples ISA allowance which is double a single person's allowance, at £30,480. A married couple could invest this each year and build up a pot worth over one million in 17 years time. They would have had to invest a total of £518,160 of their own money to do this, however this is only £259,080 each over the 17 years (£1,270 per month!).

### Why would you want to use ISAs?

Other than the fact that you can boast about how you're a millionaire, there is a very important reason to do this. Imagine a couple both aged 25 who do this. They save hard and invest intelligently and patiently. After 17 years they are both aged 42, they can retire. Why? Because they are earning a household income of over £70,000 per year and it's all tax free. Furthermore, if the couple were patient enough to save for another 8 years until the age of 50 they could be seeing return of £140,000 per year, tax free, for the rest of their lives. This would be a very comfortable retirement. It's so simple, why isn't everyone doing this? Because it's simple but not easy - many do not have the luxury of being able to save £1,270 each per month, however the thought exercise is a useful one. Always remember the miracle of compound interest.

### Millionaire Practicalities

There are many things that can get in the way of becoming an ISA millionaire but there are some solutions to some of these problems:
Returns: You may not be a shrewd enough investor, the market might collapse, there is no way to guarantee those returns? On the contrary I believe I have been stingy with those returns. Firstly, I have not assumed any reinvesting of dividends (if investing in shares). This would give a huge boost to savings each year and hopefully reach the goal line faster. Secondly, if you take a long enough time line, say 20 plus years (which we are), shares yield a historical average of at least 7%. Even if you're not very good at picking share you could simply choose to invest in an index tracker to track overall markets, which should yield you this return.
Fees: These refer to the fees that you pay your broker or fund manager and can be considerable, eating away at the compounding effect. To avoid large fees choose an on-line share dealership that you manage yourself or choose an index tracker which tends to be relatively cheap.
Savings:  A legitimate worry would be that a person cannot hope to save that much each year. If you have dependants to bring up as well it can be even harder to find the spare cash to invest. An easy solution would be for a couple to invest together in one person's ISA allowance. This is very realistic. If you assume that the average annual income in the UK is £25,000 a year which means that a combined household income of £50,000 would be investing about 20% of their income into investment ISAs. 20% is what people should be saving anyway making this goal extremely plausible.
Some of you will retort, "but I don't have a spouse/partner?". This shouldn't stop you reaching this goal. There is no reason why you can't pair up with some friends to reach the same goal. It would be a little bit more complicated and would require a lot more care when setting up contracts etc, but still it is possible. I will write a post on this another time.
If ISAs change: I believe that now that ISAs have been in existence for a while, the allowance will not go down in value. It would be political suicide to do so or to remove them without replacing the with something equally as attractive. This is because it would be viewed as anti-poor as the original idea was to encourage the poorer members of society to save. A country needs to encourage saving to grow (I will not go into the economic explanation here, message me or comment if you would like to know more) and all governments know this.

### Conclusions on the ISA millionaire theory

In theory anyone can become a millionaire. The only question is whether or not you have the patience or are able to make the sacrifices.

What do you think? How plausible is this scheme? What other schemes exist to make this sort of tax-free income?