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Cash ISAs: millions of Britons could be making a huge financial mistake

Edward Sheldon, CFA
The letters ISA (Individual Savings Account) on dice on stacks of gold coins on a white background.

HMRC has released Individual Savings Account (ISA) statistics for the 2018/19 financial year and, quite frankly, the figures are worrying.

While the statistics show that more people saved into an ISA last year, which is a good thing, they also showed that Britons piled a ton of money into Cash ISAs while neglecting Stocks and Shares ISAs. According to HMRC, the number of people using Cash ISAs rose by 1.4m, while the number of people subscribing to Stocks and Shares ISAs fell by 450,000.

In my view, this is alarming. Ultimately, millions of Britons could be making a huge financial mistake.

Cash ISAs could hurt your wealth

The reason I say this is that the interest rates on Cash ISAs right now are shockingly low. For example, a quick Google search tells me that the best Cash ISA rate (easy-access) is just 0.9%.

If you’re earning that kind of interest rate on your savings over the long run, you’re only going to go backward financially, when you consider the effects of inflation (rising prices of goods and services over time). Earn that kind of interest rate for a decade and you’ll find that when you come to spend your money, it buys you a lot less than it does today.

Of course, cash savings are useful when it comes to saving for short-term goals. They’re also important for emergency savings. However, in the long run, cash savings are ineffective when it comes to building wealth.

For a long-term saver, cash makes no sense,” says Holly Black, of research firm Morningstar.

Pick the right ISA

If your financial goals are more long term in nature, you’re much better off putting your money in a Stocks and Shares ISA or Lifetime ISA, in my view.

Both protect your wealth from the taxman, as the Cash ISA does, but with these two versions of the ISA, you can invest your money in a selection of wealth-building assets such as stocks, funds, exchange-traded funds (ETFs), and investment trusts.

For example, with a Stocks and Shares ISA, you can invest in a top fund such as Fundsmith Equity, which has turned £10k into £50k in less than a decade. Or you can invest in an investment trust like Scottish Mortgage, which is up more than 50% this year. Another option is to buy a low-cost ETF that tracks a major stock market index such as the FTSE 100 or the S&P 500.

Alternatively, if you fancy yourself as a stock-picker, you can put together a portfolio of stocks yourself. This strategy is slightly riskier than buying a fund or ETF but has the potential to deliver higher gains. For example, had you invested £2k in Boohoo shares five years ago, that money would now be worth over £20k.

These kinds of investments could help you build your wealth far more effectively than a Cash ISA.

Put £10,000 in a Cash ISA and earn 0.9% per year for a decade and your money will grow to £10,937. Put £10,000 in a Stocks & Shares ISA and earn 10% per year through the stock market, and your money will grow to £25,937. That’s a big difference.

If your goal is to grow your wealth, I’d pass on the Cash ISA and look at a Stocks and Shares ISA or Lifetime ISA instead.

The post Cash ISAs: millions of Britons could be making a huge financial mistake appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Boohoo and Scottish Mortgage Investment Trust and has a position in Fundsmith Equity. The Motley Fool UK has recommended boohoo group. 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.

Motley Fool UK 2020