Broadly speaking, there are very few mistakes a saver can make that are worse than putting their money in a low-yielding account like a Cash ISA and expecting to make decent returns.
I’m not going to say that cash accounts don’t have their uses. It’s always a sensible idea to have capital set aside for a rainy day and for emergency costs. Products like Cash ISAs are also a handy temporary destination for money you’ve earmarked for a big purchase like a car or a holiday.
Putting the lion’s share of your hard-earned savings in one of these accounts can seriously destroy your wealth on a long-term basis, however. Research just released from Sourced Capital underlines the massive impact they can have on your financial health.
The peer-to-peer lending platform looked at the annual rate of inflation since 2012. It then compared this with the annual interest rate on an average savings account and the rate on an average one-year, fixed-rate ISA too.
It first looked at the rate of consumer price inflation (or CPI, the main inflation gauge) over the past eight years to get a guide to the rising cost of living. Sourced Capital then calculated that £1,000 worth of goods on the high street in 2012 would have risen to £1,153 today.
So what about theoretical returns from those aforementioned accounts in that time? If you had parked £1,000 in the average savings account in 2012 this would now be worth just £1,048. And things are hardly better for those who’d put their money in one of those fixed-rate ISAs. A grand stashed away in one of those would have made you a mere £1,126 today.
Clearly those hoping to have made big returns on their saved-up cash would likely have ended up disappointed by the end of the decade. But this is only half of the problem. As Sourced Capital comments: “The interest earned on these savings options would have been wiped out due to the increasing cost of inflation.”
Stick with stocks
Those looking to build a handsome nest egg for retirement would be better off investing in shares. Doing this through a Stocks and Shares ISA also allows individuals to shield their returns from the gaze of the taxman too.
There’s a wealth of information out there showing how stock markets can make savers a fortune. They have even made many Stocks and Shares ISA investors millionaires. Studies show that long-term share owners can make an average return of 8% to 10% per year.
So what would someone who put £1,000 to work in a Stocks and Shares ISA in 2012 now be looking at returns-wise? Well, based on those figures above, an individual would have seen the value of their savings risen to anything between £1,851 and £2,144. This represents a difference of up to £1,000 versus total returns from one of those fixed-rate ISAs.
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Royston Wild 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.