The Cash ISA was the first investment product I opened as an adult. It was a convenient place to keep my savings, with a decent interest rate and the facility of shielding my returns from the taxman.
Like most of us who are just starting out, I didn’t have a lot of earning power and so investing in stocks and shares didn’t seem like an option. Holding my money in a Cash ISA was a good idea until I needed it to pay bills, splash out on a rare luxury, or hold it for a rainy day.
Now I still own a Cash ISA, but it plays a significantly-reduced role in my overall savings and investment strategy. I still use it to hold emergency cash but that’s about it. Interest rates are so pathetic that you’re unlikely to make any sort of decent return on your money. This is why I mainly use a Stocks and Shares ISA in my quest to get rich and retire early.
Forget the Cash ISA
A stocks-based ISA offers the same benefit as a Cash ISA in that it saves you having to pay tax on any gains. But the difference between the returns you will likely enjoy from your savings in each type of ISA is like the difference between night and day.
Let’s say that you start paying into a Cash ISA at the age of 25. You put £350 aside each month up to the age of 65 when you plan to retire. Based on an interest rate of around 1% you’d realise a total return of £206,000. Hardly a huge return for a lifetime of hard saving, I’m sure you’ll agree.
Now, compare that with what a Stocks and Shares ISA investor can expect to make over the same period. With the average long-term return sitting at between 8% and 10% a year, someone who uses one of these products could expect to create between £1.1m and £1.9m over the same timeframe.
A better way to make a million
This is why I continue to largely shun the Cash ISA despite the threat of another stock market crash. The prospect of a painful and prolonged recession doesn’t encourage me to park my money here instead of in my Stocks and Shares ISA.
Sure, share pickers might not enjoy big returns over the short term as the global economy slows considerably. But those individuals who have time to buy and hold companies for five years (and longer) will have the opportunity to ride a market recovery and thus enjoy a high return on their cash. Indeed, the 2020 stock market crash leaves plenty of bargains out there waiting to be snapped up, whatever your attitude to risk.
Picking up quality stocks following market crashes is a key part of maximising your investment returns. It’s a strategy that has helped the number of Stock and Shares ISA millionaires balloon over the past several years. And this is why I think the recent market crash provides stock investors with a once-in-a-lifetime opportunity to make spectacular returns on their cash.
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.