We here at The Motley Fool believe that parking your hard-earned savings into a cash ISA is one of the most bafflingly bad decisions an investor can make.
For most people, being able to store away some surplus cash at the end of the month is no small feat. Wage growth may be improving, but it’s still pretty meagre when compared with the salary rises in the run-up to the financial crisis which, lest we forget, occurred a whopping decade ago. And at the same time, the cost of living is going steadily up.
So why are so many of us working so hard to make up some savings, only to make the cardinal mistake of stashing the majority of it into a low-yielding account?
Useful but dangerous
The problem with selecting accounts with low returns like the cash ISA is twofold. In the current inflationary environment, your money is actually losing value the longer you leave it locked up in such an investment vehicle. The best of these easy-access products currently yield 1.4% AER and are offered at Charter Savings Bank and Virgin Money. With inflation sitting around 2.5%, these accounts are eroding what your money is worth.
Problem number two is that the money you’ve stored away could have been better put to work through stock market participation. The geopolitical and macroeconomic landscape may be bumpy right now, but there’s still plenty of shares out there that can create a great income for you.
Don’t get me wrong, cash ISAs have their place, and I myself have such an account. The difference being, though, mine is used for emergency funds, solely. The bulk of your savings should always be put in higher-yielding vehicles. A failure to do so will almost certainly leave you with not much to retire on.
Things to worsen in 2019?
I mentioned, the impact that rising inflation is having on the capital held in cash ISAs is bad. And in 2019, investors need to be wary that inflation could pick up further from current levels. Sterling has been back on the defensive in recent weeks, as negative shouts over prime minister Theresa May’s Brexit plan have risen to a cacophony. Expect the situation to remain tense and volatile in the first few months of 2019 at least, and thus for the pound to head still lower.
What’s more, cash ISA investors shouldn’t rely on the Bank of England to raise interest rates in 2019, given the fragile economic conditions in the UK. And this means the savings rate improvements offered by lenders are probably about as good as it will get. Indeed, should Britain exit the European Union under a ‘no deal’ scenario, then the Bank of England may be forced to cut rates again to support the domestic economy. That’s a situation that would lead to current cash ISA products being replaced with lower-yielding ones.
It’s tempting to leave your cash locked up in a benign savings account during turbulent times like these. But don’t think that your money is protected. Leaving your money to rot in a low-yielding account is likely to cost you a fortune.
