Would you like to make a million? I expect you would. Will you achieve it using a Cash ISA?
With typical interest rates lower than inflation, you’ll lose money in real terms with a Cash ISA. So that seems like a no.
Looking round today, I’m seeing top rates of around 1.3%, while inflation is expected to come in at 1.8% in the first quarter of 2020. You can get slightly better rates if you’re prepared to tie up your cash for a fixed term. But that removes what I see as the only possible Cash ISA advantage, easy access.
It’s a shame a Cash ISA is so poor, because it gives investors a jaundiced view of ISAs in general. And that must surely put some people off considering a Stocks and Shares ISA as an alternative.
Buy shares
And that is one of the two things I’d do instead of saving cash – I’d set up a Stocks and Shares ISA.
You don’t need a lot of money to get started, and you can usually transfer in regular small sums every month. Once you have enough for an investment, you can take your time choosing the shares you want to buy – there’s no pressure to invest quickly.
Transaction charges tend to be fixed, and are usually low. My provider charges a fixed £11.50 per buy or sell, for example, and there’s 0.5% stamp duty to pay on purchases (but not on sales). I think around £1,000 is a good minimum for a single purchase, to keep charges low as a proportion of the investment.
You’ll need an investment strategy, of course, but I don’t think that need be very complicated at all. One simple approach I like is to pick FTSE 100 companies paying attractive dividends, and diversify your picks across different sectors to spread the risk.
Now, not all dividend stocks are reliable, and some can fail badly. But if you check our Motley Fool articles, it’s very likely our writers will have picked up on any risks. Right now, for example, I’m extremely sceptical of BT Group‘s potential 10% dividend.
Wait and watch
Once your Stocks and Shares ISA is underway, the second thing I’d do is wait and watch. Watch for what? For dividends.
Looking back on 2019, I received a payment £174.51 in May, followed by £79.90 in September. That’s my dividend income from my Aviva shares. The total of £254.41 isn’t enough to retire on, but it’s money I didn’t have to work for. And, if I’d invested my Aviva stake in a Cash ISA instead, I’d have had only £45 in interest.
I always reinvest my dividends, so I combined my Aviva cash with dividends from other shares for my next purchase.
What would it take to make an actual million? UK shares have returned around 4.9% above inflation per year for the past century. Allowing for 2% inflation long term, I reckon you’d need to invest around £870 per month for 30 years. For a lot of people, I think that’s actually feasible. But whatever you can afford to invest, you could do much better with a Stocks and Shares ISA than a Cash ISA.