How increasing your ISA contributions by £25 a year could turbocharge your returns

Putting a little bit more into your ISA each year can provide a major boost to your wealth over time. We’re not talking about giving up all of life’s luxuries to free up money to invest, merely finding a tiny bit more each year

Someone who invests £5,000 as a lump sum and makes no further contributions would have a pot worth £16,931 after 25 years, based on 5% annual investment growth after charges. More than tripling your money for paying in once and letting the market work its magic is a great reward for doing very little.

Source: AJ Bell

How additional contributions work their magic

Imagine if you could drip feed a little bit more into your ISA on top of the original £5,000 investment. It could turn that £16,931 pot at the end of the rainbow into something even more colourful.

Let’s say you invest £25 each year and increase it by £25 each year – that’s the equivalent of a round of drinks in the pub or a couple of tickets to the cinema. Nothing that breaks the bank.

You start with a £5,000 investment and after one year, add a further £25. A year later, you invest another £50, followed by £75 the year after and then £100 the year after that. Keep raising the annual amount by £25 increments.

After 25 years at 5% investment growth post-charges, your ISA would be worth £28,863. During that period, you would have made total additional contributions of £7,500 on top of the initial £5,000 starting balance. But even taking that into account, it’s clear that drip feeding your ISA has worked wonders. You would have made an extra £4,431 in investment returns versus the strategy of paying in once and doing nothing afterwards.

Source: AJ Bell

Let your ISA share the magic of a pay rise

It’s a good habit to increase investment contributions every time you get a pay rise. Try to allocate a bit more money to your ISA at each pay increase, rather than think you’ll do it after treating yourself for a few months with the extra cash in your pocket. There is a risk you never get around to increasing those contributions.

Doing it straight away means you know where you stand with the remainder of your wages accounting for investing, bills and other essentials. It can help you formulate a plan so you better manage your finances.

Someone enjoying a decent pay rise every year might be able to put away even more than £25 extra each year. Raising contributions by £50 a year (on top of an initial £5,000 investment) would see your ISA grow to £40,795 in value after 25 years, assuming 5% annual investment gain after charges. You would have contributed £20,000 in total, meaning your investment gains add up to £20,795.

Just remember the phrase ‘a little goes a long way’, as you’ll be thankful for that extra money down the line.