It’ll soon be New Year and folks will start resolving to do better with their finances in 2020. Some will actually do it too, and that’s a very good thing.
But, if the record is anything to go by, thousands are going to miss a great opportunity to seriously boost their long-term wealth and will do what I reckon is the wrong thing — they’ll put their money into a Cash ISA.
In the 2017-18 year, while a total of 10,815 adult ISAs were taken out, 7,783 of those were Cash ISAs. And of the £69.3bn invested in ISAs, £39.8bn was saved in cash. With the best ISA interest rates of around 1.35% these days, that seems like a lot of dead money.
Cash ISA interest rates pay less than inflation, so why would it make sense to save tax on an actual real-terms loss? To me, it simply doesn’t, especially not when FTSE 100 shares are looking such good value.
The latest research from AJ Bell shows that the FTSE 100 is forecast to deliver dividend returns of 4.8% in the current year. That’s ahead of inflation, and easily ahead of a Cash ISA.
If you could invest a one-off £20,000 (the ISA limit), after ten years at 1.35% interest you’d have a little under £23,000 in a Cash ISA. But in a Stocks & Shares ISA, the same investment could grow to a few pounds short of £32,000, from those dividends alone.
Any share price gains would be on top of that, and though there’s no guarantee, over the past century and more the UK stock market has come out ahead of cash in the vast majority of 10-year periods. The past decade has not been a great one, but even then Footsie share prices have grown by an average of approximately 3.8% per year.
If we see just a repeat of that over the next 10 years, and dividends remain at today’s yields, your £20,000 could grow into £45,000 in a Stocks & Shares ISA (compared to less than £23,000 in a Cash ISA, remember).
I suspect it’s more likely that share prices will grow faster than that, and that dividend yields will come down closer to longer-term averages as a result. Studies by Barclays show that UK stocks tend to provide total returns of around 4.9% above inflation in the long term.
If that holds up, assuming inflation of around 2% for a total 6.9%, how rich could a Stocks & Shares ISA make you? Investing £1,000 per year in a Stocks & Shares ISA starting in 2020 could be worth £14,000 in 10 years time, and as much as £42,000 in 20 years. And the full £20,000 per year could grow to £285,000 by 2030 and £840,000 by 2040.
The more the better
I know most people won’t have the full £20,000 to spare each year to invest, but I doubt there are many reading this who couldn’t stash away at least £1,000 per year — it’s only approximately £83 per month. And every £1,000 above that can result in a significant boost to your wealth over the long term.
So yes, I strongly encourage everyone to examine their finances in the New Year and stash away as much as they can every month — but I really think using a Cash ISA is a huge waste of an opportunity.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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.