Cash Is No Longer King For Savers

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If you are a saver with a share in that £269 billion cash squirrelled away in ISAs, you could be making a big financial mistake.

ISAs offer miserable returns on cash savings – meagre interest rates of around 1%.

These sort of low interest returns from the banks and building societies make ISAs poor long-term investments.

But 46% of savers opt for keeping cash in an ISA when they could do so much more with their money.

Keeping savings in cash is a good idea for the short-term, but if you want to lock your money away for more than five years, then forget cash ISAs.

Spending power

It’s likely if you keep your money in a cash ISA for more than a year or two, your savings will go backwards thanks to inflation.

Inflation is about your spending power with the money you have saved.

If prices increase at a rate of 2.5% a year, then your cash savings need to grow at a faster rate for your spending power to outstrip the rising cost of living.

The longer cash is kept in an ISA and the cost of living rises, the weaker a saver’s spending power becomes.

Stick £20,000 in an ISA for 10 years at an interest rate of 1% and inflation running at 2.5% and the rate of return is -1.5% a year. Your spending power at the start is £20,000, but this drops to below £17,500 at the end of the term.

Taking away risk

A better option is a stocks and shares ISA which lets you stake money in a fund or directly into shares.

Most financial experts recommend a FTSE tracker fund, which does what it say – mirrors rises and falls in the FTSE.

On average, the best trackers have yielded 25% in recent years, although this past performance is no guarantee of future profits.

Cash ISAs are OK for stashing savings for a year or two. They take away the risk of a falling market wiping out your savings if you are stationing money for a while with the intention of paying off a mortgage or other debt.

In this case, a minor 1% or 2% bite out of your savings is not such a big deal.

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