Saving money is never a bad choice. Indeed, everyone should have a little money put aside for a rainy day.
However, with interest rates where they are today, saving large amounts of cash does not make much sense.
For example, the current rate of inflation currently stands at 1.4%, while the average interest rate available on most savings accounts is less than 1%. This implies that money saved in one of these accounts is losing 0.4% of its purchasing power or more every year.
As such, investing your money in FTSE 100 stocks could improve your chances of building a sizeable nest egg and passive income stream.
Time to start investing
Investing £500 in a low-cost FTSE 100 tracker fund, rather than a Cash ISA seems like a better option.
At the time of writing the stock index supports a dividend yield of 4.3%. What’s more, since inception three decades ago, the index has produced an average total annual return of 9%.
These returns far exceed the rate of interest on offer from most savings accounts today.
That being said, investing in the stock market doesn’t come without risks. It is impossible to tell what the future holds for the stock market and the UK economy in the near term.
Therefore, for savers with a short-term time horizon, this might not be the best option.
However, if you are saving for retirement or trying to build a large financial nest egg, buying the FTSE 100 could help you achieve your financial goals.
The index’s returns over the past 30 years show that over the long term, despite near term challenges, the FTSE 100 can produce attractive returns for its investors.
The FTSE 100 also offers a broad level of diversification. The index is made up of 100 of the largest companies in the world. These companies generate revenues from all over the globe.
As such, there’s a low risk that the index will produce a loss for investors over the long run.
The constituents also operate in a wide array of sectors. There are pharmaceutical companies, oil companies, banks and tech stocks. So, even if we face another severe financial crisis, the index should fare relatively well.
The FTSE 100 lost 40% of its value in the last financial crisis, but thanks to its broad diversification, within two years of hitting the low the majority of the crisis losses had been erased.
The power of compounding
Looking at the FTSE 100 returns, it is difficult to argue that cash is a better investment. If the index returns 9% per annum for the next 30 years, an investment of £500 will grow to be worth £3,000.
That’s compared to £600 for the same investment in a cash savings account with an interest rate of less than 1%. It is difficult to argue with these figures. For long-term investors, the FTSE 100 appears to be the much better buy.
Rupert Hargreaves owns no share 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.