If you’re searching for a best buy Cash ISA, then brace yourself for disappointment. I’ve just had a look at what’s available, and it makes dismal reading.
Cash is no longer king
One or two pay variable rates of up to 1.3% a year with instant access but, very quickly, you are looking at 0.4% a year, which is next to nothing.
Even if you are willing to lock your money away for a set period, it doesn’t help much. You might get 1.7% a year, provided you can tie your money up for three years.
While everyone needs some money in cash for emergencies, you don’t want to leave too much sitting in a Cash ISA. If you do, your money is actually falling in value rather than increasing. What’s the point of that?
Your money is actually shrinking
Although inflation has fallen to just 1.5%, most Cash ISAs actually pay less than that. Say yours pays 1% a year, and you leave it there for 10 years, you’ll earn just £46 worth of interest in that time. It gets worse.
Although nominally you’ll have £10,046 by 2030, after accounting for inflation, your money is worth just £9,518 in today’s terms. Your spending power is almost £500 less than you started off with.
That’s what cash does to your wealth, over the longer run. Which is why on the Motley Fool, we put our faith in stocks and shares instead. Over the longer run, history shows markets generate a superior return to cash, with a typical average total return of 7% a year.
That’s made up of capital growth from rising stock markets, and the dividends companies pay to shareholders as a reward for holding their stock. The key is to reinvest those dividends for growth, because that way you pick up more shares, which pay more dividends, so your money keeps growing.
Choose between shares and funds
Some people like to buy individual company stocks. You can buy a spread of them, and take all your returns free of tax inside a Stocks and Shares ISA. Now this is riskier than cash, obviously, because sometimes companies see their share prices fall sharply in value. They can even go bust. So if you do this, invest in a rage of different stocks, to spread your risk. Here are five stock recommendations for a starter portfolio.
Alternatively, spread your risk even further, by investing in a fund of shares, which greatly reduces the damage if one goes bust. Now could be a good time to invest in the UK’s blue-chip index, the FTSE 100, which should get a lift as Brexit uncertainty eases, and investors start putting their money into the UK again.
The index is on course to yield 4.7% a year in 2020, with any capital growth it generates coming on top of that. That’s not bad. FTSE 100 performance has been so-so lately, but this could actually make now a good time to invest, because it has some catching up to do.
Use a Cash ISA for money you might need in the next year or two. If setting money aside for five years or longer, shares are the way to go.
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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.