The Motley Fool

Forget the Cash ISA! I’d buy the FTSE 100 today

Image source: Getty Images

After the Bank of England decided to slash interest rates last month, Cash ISA providers have rushed to follow suit. The highest flexible Cash ISA interest rate on the market at the moment is just 1.25%.

If you are willing to lock your money up for a year or more, you can earn a better return, but not by much.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The best one-year fixed Cash ISA offers an interest rate of just 1.35%. The best two-year Cash ISA provides a rate of 1.46%.

With this being the case, if you are looking for a better return on your money, buying the FTSE 100 might be a better option.

Cash ISA alternative

The most significant benefit of opening a Cash ISA is its tax benefits. You never have to pay tax on income or capital gains earned on money held in an ISA. But that applies to Stocks and Shares ISAs too.

However, the one primary drawback of using a Cash ISA over a Stocks and Shares ISA is a lack of flexibility.

With a Cash ISA, you have to accept the interest rate offered by the ISA provider. With a Stocks and Shares ISA, you can shop around for better investments. In fact, you can own any investment as long as it is traded on a “recognised exchange.” That essentially means any stock or bond that’s traded on a developed market stock exchange.

Having said that, picking stocks can be a challenging process. Even the professionals get it wrong regularly. Therefore, a better strategy might be to own the entire market.

Indeed, investors who were savvy enough to buy a FTSE 100 tracker fund at the height of the financial crisis saw a return of 9% per annum on their money to the beginning of March.

The other benefit the UK’s leading stock index offers is income. Even after the tidal wave of recent dividend cut announcements, the index still offers a dividend yield that’s more than double the 1.25% interest rate on the best Cash ISA on the market right now.

When companies resume their cash return plans, it’s likely the index’s yield will rise significantly from current levels.

The bottom line

So overall, while owning a Cash ISA might seem like a safe option in the current market, from a long-term perspective, it might be a big financial mistake. Because inflation has averaged 2% per annum for the past few decades, a return of 1.25%, suggests that your money will earn a negative real interest rate. That implies your money will lose purchasing power over the long run.

With this being the case, if you are serious about saving for the future, it could be best to look past the market’s near-term volatility and concentrate on the long-term wealth-creating power of the FTSE 100.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Rupert Hargreaves 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.