One of the biggest red herrings when it comes to investing is that cash savings accounts are one of the safest places to park your money. In truth, they can have a devastating effect on the value of your hard-earned cash. They can also cost you any hopes you might have to get rich and retire early by drawing your attention away from products that offer better returns.
The inflationary effect
The danger comes not from the idea that your bank or building society is about to go bust. Even in that unlikely event, the Financial Services Compensation Scheme will cover you up to a maximum of £85,000. The real threat comes from inflation that steadily erodes the purchasing power of your cash over time.
The threat has never been as great as it is today either, certainly not in modern times. The number of savings product providers offering above-inflation interest rates is collapsing through the floor. According to Savings Champion, the number of accounts offering inflation-beating rates now sits at 450, down by a couple of hundred in just a month. More reductions could be in the offing to as the Bank of England continues slashing benchmark interest rates.
Get rich with UK shares
The other major threat savers don’t always consider is that they can get better returns elsewhere. Even before the 2008/2009 banking crisis, a period when the BoE’s base rate sat around 5%, it was unlikely you’d be able to get rich and retire early from a cash account.
This is where the advantages of investing in UK shares become apparent. Studies show that long-term stock investors tend to enjoy an average annual return of between 8% and 10%. That’s some way above the mid-single-digit interest rates that cash savers could get a decade ago. And it’s a solar system away the sub-0.1% rates that most high street banks and building societies offer right now.
Go for an ISA
This is why savers would be much better investing their money in something like a Stocks and Shares ISA to try and get rich. These offer a way to make big returns while shielding your returns from the grasp of the taxman. And they provide better returns than Cash ISAs. Even the best-paying instant-access Cash ISAs on the market (supplied by Cynergy Bank and National Savings & Investments) offer a paltry 0.9% interest rate, according to price comparison website comparethemarket.com.
The Stocks and Shares ISA has created a world of opportunity for Britons to get rich. Just ask one of the many ISA millionaires that have been able to get rich and retire early by buying UK shares.
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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.