Time to Get Your Cash Growing
Most people have money saved in cash ISAs. ISAs are a great way to put money away for a rainy day and there’s no tax to pay. The problem is that most cash ISAs offer really low rates of interest right now. Most ISAs deliver interest below the rate of inflation. That means the real value of your money is actually going down each year.
A recent report by Royal London highlights the fact that many people are using cash ISAs for their long-term savings, building up significant cash sums by adding to them year-on-year. The report suggests, they could be losing out substantially as a result. This highlights the dangers of holding long-term savings in cash.
£1,000 now worth just £910
Although inflation has been relatively low for some time, the cost of goods and services is still rising faster than the very low returns being paid on cash accounts (on average less than 1% each year since 2010). This means that although cash does slowly grow in these accounts, its buying power has been gradually eroded.
The report estimates that funds in cash ISAs have lost more than 9% of their purchasing power over the last 10 years. In other words, if £1,000 had been deposited in a cash ISA ten years ago it would now be worth less than £910 in real terms.
Saving for the long-term in this way could lead to a significant reduction in your total level of wealth and lead to a reduction in your standard of living.
What are the alternatives?
Some people are reluctant to put their savings into more complex investments like stocks and shares, seeing this as too risky. However, the report specifically compares investment in a cash ISA with investment in a ‘multi-asset fund’, which spreads your savings across a broad range of investments.
The idea is that while some of your investments may drop in value during a particular period, others may do well, balancing out the overall returns over time. So while the value of investments can fluctuate, by investing in this way, you shouldn’t experience the very high volatility that can hit riskier investments. The research shows that these investments have consistently outperformed cash deposits since 2008, making them more attractive for long-term savings.
£1,000 could be worth £1,300
The report estimates that if £1,000 had been placed in a multi-asset fund rather than a cash ISA, its purchasing power could have increased by more than 30% in real terms. In other words, if you had invested your £1,000 in a multi-asset investment fund ten years ago, it could be worth more than £1,300 in today’s values.
So, while it may still be wise to maintain some emergency savings in a cash account, you might consider placing your long-term savings in a well-managed investment fund. There is a wide range of funds from which to choose. To ensure that any funds you invest in reflect a suitable level of risk, and that they are aligned to your individual needs and circumstances, it’s important to seek professional financial advice before investing.
Why NorthStar Wealth Management?
At NorthStar, we provide award-winning independent financial planning designed to help you take control of your money, grow your wealth, protect your lifestyle and plan for a more certain future. We bring a fresh perspective and innovative approach to wealth management. Our team of chartered financial planners combine their expertise with the latest technology to provide the highest quality independent financial planning and advice. Based in Ocean Village, Southampton, we have clients across the UK.
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Don’t let too much of your money languish in a cash ISA earning little interest
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