Having £20k in savings gives one plenty of options in life. With that kind of money, one could potentially put down a deposit for a house, buy a nice car, or travel the world.
Of course, invested for the long term, this money could grow into a much larger sum. With that in mind, here's how I'd aim to turn £20k into £100k.
Assuming I was willing to invest the whole £20k (i.e. I had some other money set aside for emergencies), the first thing I'd do is put my money into tax-efficient investment accounts. By doing this, I could minimise future tax liabilities and grow my wealth faster.
A Stocks and Shares ISA could be a great option here. With this type of account, all gains and income from investments are tax-free. And every adult has an annual allowance of £20k, which would work well for my savings.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Once my money was in a tax-efficient account, I'd look to invest it.
Now, when it comes to investing for the long term, it's hard to beat the stock market.
Over the long run, the stock market has returned around 7-10% per year on average. That's a far higher return than savings accounts have delivered.
However, to achieve that kind of return, one needs to build a proper, well-diversified investment portfolio.
This means owning more than just a couple of stocks.
It also means investing internationally. The UK has some great companies. However, most of the world's most dominant businesses today are listed abroad.
So, what I'd do here is channel at least half of my £20k into global investment funds. These would provide me with exposure to a broad range of stocks at a relatively low cost.
I'd go for a mix of cheap tracker funds, which simply track an index such as the FTSE Global All-Cap Index, and top-performing actively-managed funds such as Fundsmith Equity, which has outperformed the market by a wide margin since its launch in 2010 (past performance is not an indicator of future returns).
With the remainder of my money, I'd invest in a selection of high-quality individual stocks in an effort to beat the market and reach my £100k goal in less time.
Individual stocks are riskier than funds. However, they offer the potential for significantly higher gains.
For example, if I was able to identify, and invest in, a winner such as artificial intelligence (AI) chip designer Nvidia (which has turned a $2k investment into about $13k over the last five years), I could potentially turbocharge my returns.
How long would it take me to turn £20k into £100k using this investment strategy?
Well, assuming I was able to achieve a return of 8.5% per year on average (returns would fluctuate from year to year), I calculate that my capital would be worth £100k after around 20 years.
However, if I was to add to my investment regularly, I could reduce this time dramatically. For example, if I was to invest another £5k per year, I could potentially hit the £100k mark in just nine years.
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Edward Sheldon has positions in Nvidia and Fundsmith Equity. The Motley Fool UK has recommended Nvidia. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.