The Cash ISA is a popular financial product. Government figures show that today, millions of Britons have savings in them.
They’re a good way to save money, earn tax-free interest on it and know that it’s safe. What a lot of people don’t realise though is that it’s hard to build real wealth with a Cash ISA. Below, I’ll explain why, and also highlight some other options to consider.
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Cash ISA returns aren’t great
History shows that it’s hard to get ahead financially with a simple cash savings product like the Cash ISA. The issue is inflation. Often, it averages between 2%-3% per year (in the UK it spiked up over 10% during the coronavirus pandemic).
If it’s running at 2.5% and you’re earning 4% from a Cash ISA, you’re really only growing your money at 1.5% a year in ‘real’ terms after inflation. That’s not ideal.
Invest £100,000 for 20 years at a return of 1.5% a year, and you’ll end up with just £135,000.
Building real wealth
To actually build wealth over the long term, it’s smart to consider stock market-based investments such as stocks, funds, and exchange-traded funds (ETFs). These can be held inside products such as the Stocks and Shares ISA, Lifetime ISA, and Self-Invested Personal Pension (SIPP).
Over the long term, the stock market tends to return around 7%-10% per year on average. So, it can be a powerful tool in the battle against inflation.
For example, let’s say that one was able to generate a return of 9% per year from stocks for 20 years. And over that time, inflation stayed at 2.5%.
In this scenario, the investor would be looking at real returns of 6.5% per year. That kind of return would take a £100,000 investment to about £352,000 over the course of two decades (that’s £352k in today’s money).
That would be a good result. The investor would have more than tripled their wealth.
Investing in stocks
Of course, investing in the stock market is more complex than investing in a cash savings product. But you’d be surprised how easy it is to build a basic long-term portfolio today.
A good place to start is a global tracker fund. One example to consider here is the Vanguard FTSE All-World UCITS ETF (LSE: VWRP).
This provides exposure to over 3,500 stocks from a range of countries. So it could be a great foundation for a portfolio.
With this fund, one gets exposure to lots of world-class businesses including the likes of Apple, Nvidia, and Visa. And ongoing fees are low at just 0.22% per year.
In terms of performance, it returned 61% for the five-year period to the end of 2024 (in US dollar terms). That equates to an annualised return of about 10%, but past performance isn’t an indicator of future returns.
It’s worth pointing out that this kind of product can be volatile in the short term. If there are concerns about the global economy, or geopolitical risks, its share price can fall.
I think it’s a great place to consider starting though. From there, one could potentially look at adding in some growth stocks such as Amazon or Microsoft to try and boost returns. Over the last 20 years, these stocks have returned far more than 10% per year.
This post was originally published on Motley Fool
