UK Markets close in 1 hr 28 mins

Looking for the best Cash ISA rate? I think you’re missing the wood for the trees!

Edward Sheldon, CFA
A person holding onto a fan of twenty pound notes

With interest rates remaining low, many people these days spend a considerable amount of time looking for the best Cash ISA and easy-access savings accounts interest rates. In order to pick up a little bit more interest, they monitor popular price comparison websites for the highest interest rates and then move their money around between different savings account providers in order to pick up the highest rates.

You have to wonder if it’s worth the effort though.

Shocking interest rates

Ultimately, unless you have hundreds of thousands of pounds to deposit, it’s really not going to make a big difference whether you’re earning 1.3%, 1.4%, or 1.45% on your money. On savings of £10,000, an interest rate of 1.45% gets you interest of just £145 for the year while 1.4% gets you interest of £140. That extra five pounds for the year is hardly going to change your life, is it?

I’ll also point out that if your money is sitting in a Cash ISA or an easy-access savings account earning 1.45%, or so, it’s actually losing purchasing power over time because inflation (rising prices of goods and services) is running at around 2%.

So, in my view, it doesn’t really matter what interest rate you’re getting in the current low-interest-rate environment. The bottom line is that if your money is sitting in cash savings, you’re getting poorer, in real terms, over time.

Much higher returns

The good news however, is if you’re willing to invest your money, as opposed to just saving it, it’s possible to generate much higher returns.

For example, on my Royal Dutch Shell shares, I pick up a dividend yield of around 6% per year – over four times the best Cash ISA rate. Every quarter, I receive a nice little cash payment from Shell, simply for being a shareholder.

Similarly, my Lloyds Banking Group and Legal & General shares also pay me bumper dividends on a regular basis, all for doing nothing. The yield I’m receiving on Lloyds is around 5%, while the one I’m getting on Legal & General is nearly 7%.

At the same time, I’m also picking up some huge capital gains from growth stocks. For example, early last year I bought some shares in sportswear/trainer specialist JD Sports Fashion for around 330p. Today, those shares are worth 770p, meaning I’ve made a return of more than 130% in less than two years.

More recently, I picked up some shares in online fashion retailer ASOS in July, and I’m already sitting on a nice 30% gain. Not bad in less than five months.

Of course, it’s important to be aware of the risks of investing in the stock market. Share prices rise and fall, meaning it’s possible to lose money. Compared to Cash ISAs, or easy-access savings accounts though, stocks are far more powerful as a wealth generator.

Ultimately, if you’re focused on the best Cash ISA rate, or the best easy-access savings account rate, I think you’re missing the wood for the trees.

More reading

Edward Sheldon owns shares in Royal Dutch Shell, Lloyds Banking Group, Legal & General, ASOS and JD Sports Fashion. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended Lloyds Banking 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 2019