How to become a millionaire from shares while on an average salary

The average salary in the UK is running close to 29,000 per year, according to various sources on the internet, many of them citing figures from the Office for National Statistics (ONS).

That amount is derived from wages for more than 400 jobs, from artists to IT managers and many roles in between, such as gardeners, chefs, and gas-fitters. And it also combines mens and womens salaries, and earnings from both full- and part-time positions.

I reckon many people will find themselves earning something close to that figure up and down the country, maybe more and maybe a bit less. So, it strikes me as a good number as raw material for the illustration in this article.

Doing something serious with 15%

I scanned the internet for suggestions about how much of our annual income we should be saving in order to fund a comfortable retirement. Many sources reckon we should put away about 15% of our gross income every year. That means 15% of our earnings before deductions for tax and National Insurance. And for a salary of 29,000, thats 4,350 each year.

Great. Do that and youre off to a good start because it works out at 362.50 each month, which strikes me as a decent amount to do something serious with! And Id aim to invest my monthly savings into shares and share-backed vehicles such as low-cost index tracker funds. Why? Because over the long haul, studies have shown that the annualised returns from shares have outpaced all other major asset classes.

According to financial company IGs website, over the last 119 years or so, UK equities have madeannualised returnsof about 4.9% above inflation. So, if we think inflation will average around 2.5% a year, we can reasonably target returns from the stock market of close to 7.5% each year when averaged out.

I plugged those figures into one of those online calculators that work out compounded returns for you. And saving 362.50 each month, increasing the annual payments by 2.5% each year to keep up with inflation, and earning a compounded return of 7.5% a year produces the following outcome:

One striking thing from the table is that compounding accelerates over time. After 40 years, for example, youll have earned a return of more than 1m even though youll only have invested around 293,187 in the first place. After those 40 years, your total pot will be comfortably higher than a million, at close to 1.4m.

What about the eroding effects of inflation?

But fair criticism of this illustration is that 40 years from now inflation will have eroded the spending power of a 1m, and such a sum may not seem so magnificent by then. Luckily, the power of compounding can help because small increases in the amount invested each month, and little increases in the annualised return earned, can both make big differences to the eventual size of the investment pot over time.

So, it pays to hunt for larger returns and to invest more. Id consider investing in managed funds, index tracker funds, and individual company shares, or a combination of the three.