Do you want to save money and get rich? This article looks at some ways you can make your money work harder than simply putting it in a cash ISA savings account.
ISAs, for example, can be flexible ways to earn bigger returns if you look beyond the simple cash option. And there are also other tax-efficient vehicles you can use to multiply your money in the quest to become wealthier.
Tax-free gains
You are probably aware that saving in an Individual Savings Account (ISA) is a way of avoiding paying tax on the interest you earn no matter how much your income from working.
The limit for saving in an ISA is £20,000 for the year from 6 April 2018 to 5 April 2019, but in reality, most people save less than the full limit each year. That’s why it’s so important that you make your savings work as hard as you can by earning as much return from interest or other means. Your returns will compound to drive wealth creation, and little improvements in interest rates you earn can compound into big differences in your overall savings over time.
Cash ISAs do have the appeal of allowing instant access to your money without any penalties, such as losing interest. But you pay dearly for the privilege because the interest rates that cash ISA providers pay are derisory. The highest-paying cash ISA I could find on one popular comparison website recently delivers interest at an Annual Equivalent Rate (AER) of just 1.38%. If you put your money in that account, you are almost certain to see the spending power of your savings decline because the interest rate doesn’t even keep up with the rate of inflation.
Breath-taking bonus!
I think a better option is to invest your £20,000 ISA allowance each year – or as much as you can afford to save – in some of the other ISA options. For example, Help-to-Buy ISAs and Lifetime ISAs come with rules about your age, how much you can save, and what you are saving for, but the government adds a 25% bonus to whatever you save in at least one of them. Yes, you read that right! A 25% return on your money — plus interest on top of that — knocks the spots off 1.38% from a cash ISA. Indeed, it’s a serious rate of return that could really turbocharge your savings.
If you find you don’t qualify for Help-to-Buy or Lifetime ISAs, I think it’s a good idea to go for a Stocks and Shares ISA. Over time, returns from shares and share-backed investments have done very well, beating most other major classes of asset. You could invest in managed funds, passive index trackers or in individual shares within your ISA.
Another tax-efficient method of saving and investing is to put money into a pension of some kind. Employers with workplace pension schemes often add more money on top of what you put in yourself, which is potentially another boost your savings. If you can’t access an employers’ pension scheme, you could always go for a Personal Pension or a Self-Invested Personal Pension (SIPP).
