Are you aware that you may have been losing money throughout the year? With inflation being higher than most interest rates, money held in many Cash accounts is actually declining in value.
Whilst the number stays the same on paper, the fact is that £100 left in a bank account in January is now worth less than it was at the start of the year. That’s because inflation has floated around a range of 1.7% to 2% throughout the year. In other words, prices have gone up while the amount of money you have has stayed the same.
You may have noticed this rise in inflation at your supermarket. Does it feel like you’re getting less for your money at the checkout? That’s inflation in action. The cost of the goods in your basket has grown nearly 2%, but money in a basic bank account hasn’t grown at all. In reality, this means your money has lost value, it simply won’t buy as much as it would have done at the start of the year.
£100 left in a basic 0% interest bank account, has a spending power of just £98 a year later, if you apply an average 2% inflation rate.
That may not sound much, but consider how this mounts up over many years. Inflation is constantly stripping your money of value. And if you think you are safe in a Cash ISA, you are wrong.
The Bank of England interest rate is currently set at 0.75%, which is what Cash ISA interest rates are based on. The best easy access Cash ISA is 1.46% which is below the current 1.7% inflation rate.
What this means is that even when you are making a little interest, the overall value of your money is still being eroded by inflation. Just like a basic current account, a Cash ISA is actually sending your money backwards rather than forwards.
So, how do you beat inflation and make your money do more?
A Stocks & Shares ISA is one potential solution. Your money is invested in a way that aims to grow over time. You aren’t pegged to an interest rate, instead your money has unlimited potential to grow in line with the Funds or Portfolios it is invested in. Inflation can still chip away at investment returns, because investments must also keep up with the rate of inflation to increase your real purchasing power. However, unlike a Cash ISA, a Stocks & Shares ISA puts your investment capital at risk, should markets not perform well.
You can use the comparison calculator on tpinvestor.com to see for yourself how Stocks & Shares ISAs compare with Cash ISAs.
Remember, with inflation higher than interest rates, a Cash ISA is actually going in reverse, while a Stocks & Shares ISA has the potential to beat inflation and grow. This growth can then snowball into even greater growth over time.
With a Cash ISA or Stocks & Shares ISA, you can invest up to £20,000 in the 2019/20 tax year. It is a tax-efficient account and you can withdraw at any time without losing the tax breaks. You can also reinvest withdrawals within the same tax year, without it counting towards your annual allowance.
Do more with your money, transfer out of a Cash ISA today, and use any spare money from your bank account to impulseSave® into your investment.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Past performance is not a guide to future performance. Tax rules can change at any time. This blog is not personal financial advice.
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