Forget about gambling on the horses and hitting the shops on payday. In this article I’ll talk about one of the biggest mistakes that Britons make with their money. And unnervingly, it’s one of the most common traps that we all fall into.
I’m talking about choosing to lock up your money in a low-yielding savings account. Okay, you may think I’m being a tad overdramatic but hear me out. It could make or break your retirement plans.
For most of us, the first step to building a handsome nest egg comes from a disciplined approach to saving money. The proverb “watch the pennies and the pounds will take care of themselves” has remained timeless for a reason. But what’s the point in scrimping and saving only to put your money to work in the wrong place?
This is where millions of us go wrong. Instead of using our money to invest in a financial product providing a decent rate of return, a great number of us simply bung it in a poor-yielding cash savings account and forget about it.
Let me illustrate the effect that this can have on your finances. Say that you choose to invest £200 a month into the best-paying Cash ISA currently on the market. One where the yield sits at 1.35%. Over the course of 30 years you’d only have a paltry £88,600 for all of your hard work.
And things promise to get worse following fresh interest cuts today. As Rhydian Lewis, CEO of peer to peer platform RateSetter, said: “The Bank of England has made the right call to support the economy at this difficult time. However, millions of savers will be nervously anticipating the interest rates on their cash to be cut to zero. With this year’s ISA deadline just around the corner and equities extremely volatile, more people than ever will now be looking for alternatives that perform steadily in order to keep their money earning.”
The better route to retirement riches
Surely you’d be better off putting your hard-saved pennies and pounds to work in a Stocks and Shares ISA, for instance?
Like its cash equivalent, this product allows you to set aside up to £20,000 in a tax year away from the prying eyes of the taxman. But the possible returns here are vastly larger than those you can expect from a Cash ISA.
Let’s say that an individual putting £200 away a month puts it in a stocks-backed ISA instead. Based on the average annual rate of return (of between 8% and 10%) that long-term investors can expect to generate, this person can anticipate a fat cash pot of between £281,700 and £412,600 over that three-decade period. A big upgrade from that sub-£90,000 return that a Cash ISA would generate at current rates, right?
The beauty for share investors right now is that the recent washout across financial markets leaves a lot of stocks looking shockingly undervalued. Some of these carry mighty dividend yields too. Take insurance giant Aviva and its whopping reading of 10.3% for 2020. Or utilities giant National Grid and broadcaster ITV, firms whose yields sit at a tasty 5.5% and 9% respectively.
The FTSE 100 is packed with long-term opportunity, in fact. And recent weakness leaves investors with a chance to make a big cash pile for retirement.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.