You’ve scrimped and saved all month to put some money away for the day when you finally get to retire. Well done. It may have been a painful exercise, but you’ve taken the first step to building a lovely little (or large) nestegg for retirement.
Well you’ve done the hard part, so what comes next? Well, putting it away in a wealth-destroying, low-yielding account like a Cash ISA, of course. Cue facepalms from everyone here at The Motley Fool.
Risk free? Don’t make me laugh!
Using these types of accounts is widely considered a great risk-free way of saving for the future. But how can they be considered risk-free when you’re more or less guaranteed to see the worth of your money erode year after year?
Forget about the headline interest rate. What you need to consider is how these rates compare with the current rate of inflation. And right now in the UK the best-paying Cash ISA offers a rate below 1.5% while the current consumer price inflation (CPI) gauge sits above 2%. And that’s quite a sharp difference, I’m sure you’d agree.
But could interest rates and inflation start to move in a way that benefit investors? Not a chance, I say. Low global interest rates are here to stay and what’s more, a worsening outlook for the UK economy means the Bank of England is likely to cut its benchmark rates in the months though 2020 too. With sterling also likely to remain under pressure through this period, it’s likely inflation will continue its northwards charge.
Get 10% returns with these accounts
The best way to weed out the impact of inflation on your hard-won cash is not to save it but to invest it. And one fine way of doing just that is by shunning those rubbish Cash ISAs and using a tax-efficient wrapper to invest in the stock market instead.
It’s been said that picking a Stocks and Shares ISA requires much more work from savers than a cash product into which you dump your money and simply forget about it. But that’s simply not true. You can drip feed money into a tracker fund — i.e. a fund which tracks the performance of a stock market index or market sector — and then sit back and reap the rewards. And parking your money in these investments can be low cost too.
Or you can do what I’ve done and go actively hunting for individual stocks. Among my holdings are dividend heroes such as Taylor Wimpey, Cineworld and Unilever to supercharge the income which I generate from my ISA.
It’s been proven that, over the long term, stock market investment tends to provide a return of between 8% and 10%, giving investors quite a buffer against those inflationary pressures I’ve mentioned. So don’t be content with the pathetic returns which Cash ISAs offer. Get out there and really make your money count, I say.
