"How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." - Bestselling author Robert G Allen
It never ceases to amaze me how many people keep the bulk of their savings in cash. According to a recent YouGov survey, the cash ISA remains the most popular UK investment product in use today, with 36% of people aged 18-59 using it as a savings vehicle.
Don't get me wrong - saving money and investing it within a cash ISA is better than not saving at all. However, the reality of the situation is that, unless you're earning an astronomical salary, a cash ISA probably won't put you on the path to financial independence.
If financial freedom is something you do aspire to, it's time to ditch your cash ISA right now. Here's why.
Times have changed
A little over a decade ago, before the Global Financial Crisis, the interest rates on cash accounts were quite attractive. With UK interest rates hovering around the 5.5% mark, you could park your savings in cash and earn relatively decent risk-free returns. On a £10,000 investment, you could pick up around £600 per year in interest for doing absolutely nothing, and taking no risk. Keeping some savings in a cash ISA back then made sense.
However, times have changed dramatically. Today, the average interest rate on cash ISA accounts is just 0.91%, according to City AM. £10,000 invested at that rate will earn you just £91 per year in interest. Invested for 30 years at that underwhelming rate, a £10,000 investment will grow to just £13,123. In other words, generating long-term wealth from a cash account has become significantly harder.
If you're serious about building long-term wealth, a good alternative to a cash ISA, is a stocks and shares ISA. This type of investment vehicle has the same key benefit as a cash one, in that income generated within it is tax-free, but the big advantage is that you can invest in a variety of faster-growing investments such as shares, funds, investment trusts and ETFs. And investing in these kinds of products, rather than cash, could make a big difference to your net wealth over time.
For example, shares as an asset class have produced returns of around 8%-10% over the long run. A £10,000 portfolio earning 10% per year would grow to an impressive £174,494 over 30 years. That's significantly more than the sum that would be generated if the funds were only earning 0.91%. Can you afford to leave your cash sitting in a cash ISA over the long term, earning next to nothing?
Cash definitely has its advantages at times. It can be sensible to use it when saving for short-term goals. It's also advisable to keep some handy for emergencies. However, when it comes to building long-term wealth, cash won't get you very far. Consider a stocks and shares ISA over a cash one if you're serious about achieving financial independence.
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