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What do we want from our savings? For me, it's about generating a second income in the long term.
In the UK in 2022, the average savings account had around £7,500. This was driven by higher savers, so the median fell to around £2,000.
But these figures vary greatly depending on who we ask. So let's think about starting today with £5,000 in the bank.
<h2 class="wp-block-heading" id="h-stocks-and-shares-isa”>stocks and Shares ISA
With that amount, assuming it wasn't money I would need in the short term, I would transfer it directly into a stocks and Shares ISA. You may not know which stocks to buy. But at least having the money there would motivate me to do some research.
Now I can't look at ISAs without first thinking about a cash ISA. They pay guaranteed returns, so there is less risk than in the stock market.
And, at least now, we can get more than 5%. But rates change over time and surely won't stay there when interest rates go down.
ISA returns
A £5,000 pot isn't really the kind of money retirement dreams are made of. Therefore, it would need to be completed over the years. But I think it is a sufficient sum to get off to a good start.
Over the last decade, the average return on ISA stocks and shares was 9.6%.
I don't think we'll see such high returns in the long term. But when we think that that was because of the pandemic and the stock market crash, it's pretty surprising, isn't it?
This shows me that investing in the stock market has to be long-term. And the longer we stay inside, the less risk we face.
How much income?
At that rate of return, a £5,000 pot could earn us £480 a year in income. That doesn't mean buying a new car every year.
What happens if we reinvest our annual dividends in new shares? In 20 years, it could grow to more than £31,300, without adding a single extra penny. And that could mean £3,000 a year as a second income. We're getting there.
Now suppose we add more money, say £200 a month.
What size retirement fund?
That could get us closer to £170,000 in 20 years. And at 9.6%, we could have £16,000 of annual income.
But I have to say that I would be very surprised if the UK stock market generates those returns in the coming decades. The very long-term average is around 7% per year.
Of course, we can't even guarantee that. But it is a goal I would be happy with: everyone has to think of their own way of taking risk.
So what could it mean?
£8,500 a year?
Starting with our £5,000 and then adding an extra £200 a month could net us a pot of just over £121,400 in 20 years.
And then we could take our income of £8,500 each year. Assuming we still average 7%.
As I say, we cannot be sure what the future holds. But do I think it's an inspiring goal?
