Having £20k in savings is a great place to be. Many of us in the UK don't have any savings at all, instead living from paycheque to paycheque. A fifth (21%) of British adults have no immediately accessible savings.
But how could I go about turning this £20k into a much bigger pot? Let's say one that's 10 times the size. Well, it's certainly possible, but it's not going to happen overnight. So here's how I'd aim to turn £20,000 into £200,000!
Well, my strategy involves investing in stocks and shares, not buying a buy-to-let apartment or cryptocurrencies.
How much I invest is going to depend on my circumstances. If I'm earning money and I can generate a buffer pretty quickly, I'd be comfortable investing all of my £20,000.
And I'd want to be doing this within a Stocks and Shares ISA. That's because dividends and capital gains taxes don't apply to funds within the ISA wrapper.
This money should be easily accessible if needed. I use the Hargreaves Lansdown platform, and I can withdraw cash on the same day. However, it takes up to two or three days if that money is invested and I need to withdraw.
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.
Assuming I don't wish to continue contributing to my £20,000, I'm going to elect a compound returns strategy, while focusing on undervalued dividend stocks.
A compound returns strategy involves reinvesting my dividends and earning interest on my interest. Essentially, it's very much like a snowball effect. The growth rate increases over time as I earn interest on an increasingly large pot.
Since its inception in 1992 until 2022, the FTSE 250 has delivered an average annualised total return of 10.6%. So if I were to achieve annualised growth of 10.6% it would take me 22 years to turn £20k into £200k.
In reality, I don't need to focus on using dividends stocks. That's because investments can compound without paying any dividends at all. For example, Amazon has been investing in its own business for years at the expense of a dividend. Over time, the company has become more and more valuable.
But investing in dividend-paying stocks does provide a little more in the way of control. After all, we can say with more likelihood that a stated dividend will be paid than the share price will increase.
As such, in the above calculation, I'd look for at least half of my total annual returns to come in the form of dividends.
Of course, no investment strategy is a guaranteed winner, and I could lose money. But I'd be looking for a way to beat the index in the above calculation. And one way I can do that is by value investing.
This is the strategy of investing in companies that are trading below their book or intrinsic valuation. Essentially, it means I need to do my research and run discounted cash flow models.
But it could be worth it. A value investing strategy has outperformed all major indexes since the Second World War. It could allow me to achieve annualised returns in excess of 10.6%, and thus speed up my journey from £20k to £200k.
The post £20k in savings? Here's how I'd aim to turn it into £200k! appeared first on The Motley Fool UK.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. James Fox has positions in Hargreaves Lansdown Plc. The Motley Fool UK has recommended Amazon.com and Hargreaves Lansdown Plc. 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.