It makes sense to avoid the end-of-year rush.
What happens around the end of March every year? Well, there's one unmissable spectacle in the investment world -- the last-minute flood of people rushing to open an ISA before they lose their annual allowance.
But that's exactly the wrong time of year to be doing it, and there are some very good reasons why.
A wasted year
As with all savings and investments, it's the compounding of returns that really makes all the difference (whether tax free or not), and if you leave one year's ISA investment until the end of the year, you'll not only lose that one year's interest (or dividend, or whatever form your return comes in), you'll also lose the compounding of that one year for the entire duration of your ISA.
Suppose you invest your entire 2011/12 limit of £10,680 on the last day of the ISA year, and then close out your ISA in 20 years time, again on the last day of the year. If you average a 6% return per year over the period, that initial £10,680 will end up worth around £34,300 (the exact figure depends on when returns are paid, etc).
But if you invest on the first day of the ISA year, and then leave the money there until the same end date, you'll effectively get 21 years of tax-free compounding out if it, and the final value of that initial £10,680 will be about £36,300 -- a full £2,000 more.
And that's with a modest 6% return. If your investing is more successful and you achieve 10% per year, the difference will be between £72,000 and £79,000 -- a staggering £7,000!
Of course, the stock market doesn't rise in a smooth straight line, so we've simplified things here a little. But if you're investing each and every year, the ups and downs should even themselves out, and you'll get the benefit of an additional year across all the investments you've made.
Saving regularly
Another benefit that comes from opening your ISA early is that you will almost certainly be more motivated to stash money away in it at regular intervals throughout the year than if you leave it until the last minute -- and most ISAs, including shares ISAs, allow you to save very modest monthly sums.
Suppose, for example, at the end of a month you've got a couple of hundred quid left over and you wonder what to do with it. If you've already got an ISA open, that's the obvious place to put it, and once you've made the transfer you probably won't think about that bit of money again.
But if you just think "Oh, I'll just leave it in the bank, and if it's still there when I eventually get round to opening my ISA, I'll put it in then". But that means it'll be lying round for months, sitting there as a temptation the next time you see some fancy new high tech doodah or glittery bauble that you want but really don't need.
Which of the two approaches is more likely to see the cash saved, and which spent? I think it's pretty obvious.
More time to choose
The Foolish approach to ISAs is really to use them to cover investments in shares. If you're getting to save the tax on your returns, you might as well make the most of it, and over the long term the stock market has beaten cash hands down. So it makes more sense to protect your shares under your ISA umbrella than to cover cash with it -- especially in times when cash savings are offering pitifully low interest rates.
But you know what that means? It means you need to think about what shares to buy. And you're just not going to have the time to make a good choice if you leave your ISA until the last week of the year.
No, what you need to be doing if you want to get a decent shares ISA built up is looking for opportunities over the course of the whole year, and buying up the bargains as and when you come across them.
Get one soon
There are other advantages to starting your annual ISA as early as possible (for example, avoiding that sinking April 6th feeling when you wake up and think "Aarrgh, I forgot"), so it really does make sense to get it sorted out as soon as you can.
More from Alan Oscroft:
This summer -- don't just apply the sun cream,
apply for a Motley Fool Self-Select Stocks & Shares ISA too!
In the hot weather everyone knows to protect their skin against the sun, but what about protecting your investments from the taxman? That's just as important to your long-term financial health.
Motley Fool's Stocks & Shares ISA can help: Trade UK Shares for just £10 per deal ● Trade in shares on 7 of the world's largest markets ● Invest up to £10,680 this tax year* ● Open your account today and you could be trading online within minutes! Click here to learn more and apply online.
The value of your investments and the income from them can go down as well as up. You may not get back the full amount you have invested. If you're in any doubt about the suitability of an ISA, or whether to buy or sell shares, you should consult an appropriate Financial Adviser. *Tax treatment depends on individual circumstances and tax laws are subject to change.
