Incredibly, tens of millions of Britons continue to let their hard-earned money go to waste inside a Cash ISA, earning next to no interest. While it is fine to use a Cash ISA for a small chunk of your money, you do not want to leave your long-term savings there.
If you do that, they will never rise in value. In fact, they will fall in real terms, as inflation erodes their buying power. Making this costly mistake could leave you far short of the money you need in retirement. For longer-term savings, I would urge people to use their Stocks and Shares ISA allowance instead. While stock markets are more volatile than a Cash ISA, history shows they deliver a far superior return over the longer run.
One of the few positive things about the pandemic is that it has got people saving again. Britons tucked away a record £25.6bn in May, according to the latest Bank of England Money & Credit report. That is five times the long-term average of around £5bn.
The Cash ISA pays lousy interest
Our revived savings culture is something to celebrate and let’s hope it lasts. However, if we are putting large sums away, we need to get the most out of them. Most of the new cash went into easy access accounts. Of this, a shocking £9.1bn was shifted into accounts paying no interest at all.
Savings rates are dismal and continue to fall. At the start of the year, the average easy access Cash ISA paid 0.85%, according to Moneyfacts. Today you get just 0.37%.
Similarly, the average notice Cash ISA paid just 1 .12% in January. Today you get 0.60%.
If you leave money in a Cash ISA for the long term, its value will dwindle in real terms. Stock market indexes such as the FTSE 100 are much riskier, of course. Share prices crashed in March, and there could be further volatility ahead.
The global economy is going through a sticky period, thanks to Covid-19. Yet this could actually be a good time to put money into shares rather than a Cash ISA, as the FTSE 100 is still down 20% on the start of the year. This means you are picking up top companies at a bargain price. To reduce risk, pick companies with steady profits, strong competitive ‘moats’ against competitors, solid cash generation and minimal debt. There are plenty of FTSE 100 bargains out there today.
I’d buy FTSE 100 bargain shares
You should only invest money in shares that you aim to hold for the long term. That means a minimum five years, but ideally 10, 15, 20 years, or longer. The longer you can leave money to grow, the better. If you do that, you do not have to worry about short-term volatility. In the longer run, shares should outperform all other asset classes. They should almost certainly beat the Cash ISA.
So check your money to see whether it is in the right place. Cash ISAs have their virtues but to save enough money to retire early, focus most of your efforts on a Stocks and Shares ISA.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.