Stocks and Shares ISA vs Cash ISA | The BIGGEST Mistakes I See!

Stocks and Shares ISA vs Cash ISA: What Do You Need to Know?

chris cash isa vs stocks and shares isa

Hello and welcome to the Tax-Free Investing Blog with me, Chris Bourne! I’m a qualified financial planner based here in the UK. I specialise in all things wealth management, retirement planning and tax planning. My goal is to bring you top tips for tax free investing to help you reach financial freedom. If you want to see other tips, make sure you check out my other blog posts here, or head over to my YouTube Channel for video versions!

Today we’re talking Stocks and Shares ISA vs Cash ISA. This is the blog you are looking for if you are unsure which is the best ISA for you and why. It will also steer you down the right path to avoid making common ISA mistakes I see all the time.

So what is it? The biggest ISA mistake I see people make is wasting their ISA allowance by opening a Cash ISA. In most cases, they could get their interest paid tax free anyway without using the ISA at all… So keep reading to find out how!

Stocks and Shares ISA vs Cash ISA: What Do You Need to Know?

If you want a recap, last week’s post was detailed breakdown of ‘UK ISA explained.’  Click here to read the full post. To get you up to speed first though, here are some quick ISA tips!

It stands for individual savings account. It’s a tax-free shelter for your savings and investments. This ensures that all the returns you receive can be paid to you without any tax deducted. You can pay a maximum of £20,000 per tax year into your ISA shelter. This can be done as regular contributions, a single contribution, or multiple ad hoc payments. You can generally access your money at any time.  

Since ISA accounts were launched back in 1999, you’ve always been able to hold cash and stocks in them. The names Cash ISA and Stocks and Shares ISA just describe the assets that you hold inside the ISA shelter.

A Cash ISA is simply a savings account sitting inside an ISA shelter. The ISA ensures that you can receive all of your interest tax free.

Here’s the problem though:

Putting a savings account into an ISA like that is usually a total waste of your ISA allowance. The reason is that anyone earning up to £50k a year has a Personal Savings Allowance of £1,000. This means that their first £1,000 of interest every year can be received tax free anyway… Even outside of an ISA!

You could receive up to a further £5,000 tax free interest before that £1,000 too through what’s called your ‘Starter Rate For Savings Band’. If you earn between £12,500 and £17,500 a year (increasing to £12,570 and £17,570 from 6th April 2021), you receive the Starter Rate For Savings Band, but it reduces by £1 for each £1 that you earn between those amounts. For example, if you earned £15,000, your Starter Rate Band would be £2,500.

Higher rate taxpayers, (anyone earning between £50,000 and £150,000 a year), can receive their first £500 of interest tax free.

Interest Rates are at All Time Lows

As we all know with the current climate, interest rates on savings accounts are at pretty much all-time low. If you wanted to retain instant access to your money, the best you could find at the time of me writing this is 0.60%. If you’re willing to give up access to your money for 2 years, the best out there is 0.80%.

So, let’s say you were getting 0.8% and your first £1000 of interest could be received tax free… you could have up to £125,000 deposited outside of an ISA before you need to start paying any tax on your interest.

In other words, it’s not until you’ve got over £125,000 deposited, or £62,500 if you’re a higher rate taxpayer, that a Cash ISA would gain you any advantage at all.

Even if you had £250,000 deposited, or £125,000 as a higher rate taxpayer, the amount of tax you’d actually pay on your interest would only be £200 over the course of the whole year!

Therefore, placing cash into an ISA gains you no significant tax advantage. All it’s doing is removing the potential for you to invest into a stocks and shares ISA. This is where you can gain some real tax benefits.

Stocks and Shares ISA

A stocks and shares ISA allows you to invest into stock market instruments like direct shares, etfs, index funds and managed funds. You can invest into them either by seeing a financial adviser, or by going directly to companies like AJ Bell, Hargreaves Landsown, Fidelity, Vanguard or Moneybox.

They’re intended for longer term investment and the value of your capital will move up and down. The longer you are invested, the greater the certainty you have of getting a good return. Usually when you sell these types of investments, you have to pay what’s called Capital Gains Tax on the growth you’ve achieved. The power of the ISA is that it shelters you completely from this.

Because these investments provide much better growth potential, the tax saving benefits are much greater too.

If you had invested £10,000 a year into an index fund held 100% in shares over the last 10 years, and that fund had delivered an average return of 10% a year (which wouldn’t be unrealistic over that period), your investment would have grown to £175,000… a profit of £75,000.

If you sold those investments, that profit outside of the ISA would be subject to Capital Gains Tax. There is an exemption on the first £12,300 of gain on which you don’t pay any tax. The remainder is subject to either 10% or 20% tax depending on your own personal tax rate.

Let’s assume you pay the higher rate though. In this example, 20% on £62,700 would mean £12,540 tax is due, assuming there were no reinvested dividends, no loss relief or other exemptions.

If that investment was held in an ISA though, that tax would be ZERO. The power of the ISA therefore is only beneficial if you’re using it to shelter investments which have the potential to produce high growth.

So Don’t Make This Mistake…

Don’t waste your ISA allowance on a Cash ISA! Use your tax-free ISA wrapper to hold stock market-based investments. Utilise your Personal Savings Allowance instead and your Starter Rate Savings Band if it’s available to you, for cash savings.

This is also where inter-spousal planning can come into play. Ensuring assets are held in the right spouse’s name for the greatest tax advantage.

I’d love to know what type of ISA you’ve got at the moment? Are you saving into a Cash ISA and will you continue to do that, or will you consider a Stocks and Shares ISA? Let me know in the comments or over on my YouTube.

Make sure you subscribe to my YouTube Channel and my website to keep up to date on when I post new tips for you to save and invest your way to financial freedom!

I’ll be back next week with more tax-free investing tips, until then, stay savvy and we’ll chat soon, Chris.

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Pay Yourself First | Why and How

Pay Yourself First – What Is This Golden Rule?

What is meant by the old adage ‘Pay Yourself First’? Why does it truly separate the rich from the poor and middle classes? How you can apply this principle yourself in order to build your own wealth and gain financial independence earlier?

In this blog I will answer all of these questions and give you some simple actions that you can follow today to put you on the path to financial freedom!

chris bourne pay yourself firstIf we haven’t met before…

Hi! I’m Chris Bourne. I’ve been a financial planner here in the UK for over 16 years. My job is to help people achieve financial independence early. I currently look after many millions of pounds of client wealth and help clients with goal setting, investment strategy and tax planning.

This blog is a place for me to share some of this knowledge with you to help you reach your financial freedom. If you are interested, I also have video’s over on my YouTube channel and other blog posts that are full of further tips to manage your money wisely.

So… ‘Pay Yourself First’…?

Is your goal to be financially free by a young age so you can travel the world? Have complete choice over the type of work that you do and how frequently you do it?

Before you even think about where to invest money and how tax efficient it is, you need to know the basic rules and principles of wealth building. Golden rule number 1 is ‘Pay Yourself First’.

This little bit of advice has been around for many, many years.

It’s thought to have been introduced in a very famous personal finance book called ‘The Richest Man in Babylon’, originally published in 1926. The principles in that book are as true today as they were then.

Millions of people have become wealthier and financially smarter people just by reading this book and following its principles. Other international best-selling books like Rich Dad Poor Dad repeat this golden rule as a concrete principle.

The rule is simply this… Out of what you get paid every week or every month, take at least 10% off it and put it aside. That amount is yours and no one else’s.

It’s not the gas compay’s or the government’s – it’s yours.

Pay Yourself First – That’s it!

Pay yourself ate least 10% of what you earn every month. If you get paid 2000 a month, 200 of it is yours and yours alone. That is the money that is used to obtain financial freedom. Simple… right?

But if it’s that simple, why do people fail to do it?

Well, the problem is that people usually fall at the first hurdle. They’re conditioned to pay their bills first you see.

FThey pay their bills and pay for their food and living costs, and then they realise they haven’t got 10% left.

OR they do put the money aside with all good intentions but at some point in the month they reach the same realisation; they haven’t got enough left.

That is when they end up dipping into the 10% they’ve paid themselves.

But that’s breaking the rule!

Remember that money is yours and yours alone.

That’s not to say you shouldn’t pay your bills or eat! Of course you need to do that you’ll get into serious trouble if you don’t! But if your outgoings cut into that 10% of your pay, then your costs have expanded beyond your means.

You then have two simple choices…

You can either cut back on costs, or if you’re unwilling or unable to do that, you can EARN MORE MONEY.

So financial freedom is really just a mindset.

If your answer to the above is:

‘I’ve got a job and it doesn’t pay me enough as it is!’

You need to find a way of adding more value to get paid more, or get another job!

‘But there are barely any jobs out there, it’s a tough market at the moment.’

So, make your own job!  A job after all is just an acronym: it means ‘Just Over Broke’.

Most employers will only pay you as little as they can get away with, so take back the power!

‘Yeah, but everything’s saturated. It’s too late now all of the money’s been made’.

Well I’m afraid if you think like that my friend, you never try. If you never try, you’ll be proven right and you’ll be confined to the rat race forever.

If you need any tips on getting some side hustles to make more money, check out this video on my YouTube channel. I give you some simple tips on a couple of things you can do to bring some extra money in.

If on the other hand…

If you think differently, and you believe you can achieve that extra income, then you’ll take ACTION.

Action is how you’ll ensure you pay yourself first and get the lifestyle you deserve. You’ve got to work for it, it’s not just going to fall into your lap.

So paying yourself first is of course just the foundation to your success. You then need to know how to utilise that money to create wealth, it can’t just sit there in a bank account. But that is for other blog posts and videos to tackle!

So, there are four actions I want you to take right now in order to get you on the path to financial freedom:

  1. If you haven’t read them already, I want you to buy The Richest Man in Babylon and Rich Dad Poor Dad. These are two essential reads to understanding the mindset of building wealth. Click here for The Richest Man and Here for Rich Dad Poor Dad.
  2. Then, I want you to let me know that you’ve got your copies by leaving a comment below, or if you’re one of the many people who have read these books, leave a comment to back up what I’m saying here! Also, recommend what you think are the best follow up reads.
  3. I want you to identify from your own income if you have at least 10% available to put aside every month. If not, I want you to start getting into the MINDSET and thinking about how you can alter that. The mindset to change is where it all starts.
  4. Finally, as I’ve already mentioned I’d really appreciate it if you could go over to my YouTube Channel, subscribe and hit the notification bell to see regular content on wealth building and financial independence.

I’ll be putting the video to this blog in a playlist called Wealth Building for Beginners. This will be made up of short videos that will help you get the base knowledge for financial success, so make sure to check that out.

pay yourself first

I’m Chris Bourne, stay savvy, we’ll chat soon.

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Beginners Guide to Financial Planning. My 10 Tips to Start Investing!

Beginners guide to Financial Planning. How to Start Investing

The idea of financial planning and investing can be daunting . It’s something that people frequently put off until tomorrow but sadly, tomorrow never comes! In this blog I’m going to give my 10 top tips to start investing. Trust me, getting started when you’re young will put you miles ahead of 99% of people.

Even if you’re not really young now though, never tell yourself it’s too late. Start today with some of these simple things and you’ll still end up being ahead of most people. Remember, it’s better late than never.

My best tips on where to start is something I’m asked about all the time. Anybody can follow these to help themselves achieve financial freedom and independence.

Right, let’s get into it…

My number one tip when it comes down to investing is…

1. JUST START INVESTING!

Start investing today into simple, low cost, index funds that give your money a broad exposure to the stock market. You don’t need to know anything about shares. You don’t need to know how to analyse any charts or reports. You don’t need to know how to read company accounts, you just need to know some very basic things…

  • Where to open an account (Vanguardinvestor.co.uk, Moneyboxapp.com)
  • Which type of account to open… I recommend a Tax-Free ISA if you haven’t opened one already (see my recent video here)
  • What to invest in… Low-cost index tracking funds or ETFs (broad market exposure – market goes up over time)
  • Money moves up and down but over a long enough period of time, you can be quite sure it will go up.
  • Don’t withdraw when it goes down in value – that is a sure fire way to lose money; just invest THROUGH those periods.

Investing regularly and automatically on a monthly basis, allows you to benefit from pound cost averaging. This basically just means buying shares at different prices, so you get bargains when they dip in value. Just starting as soon as possible and maintaining the habit can easily see your money grow to hundreds of thousands of pounds or more over 20, 30, 40 years.

If you’re 18 now, imagine having 100s of 1000s coolly stashed away in your ISA when you’re in your late 30s. You’ll definitely be in the 1%!

OR easily having enough to not only purchase your own home, but to put down as a deposit on investment properties as well to really build your asset column and passive income.

2. Start a Pension

For the same reasons as above: The longer you do it, the more it’ll be worth, the earlier and more comfortable your retirement will be.

The beauty of pensions is that HMRC will add 25% on top of whatever you pay in to a personal pension through what’s called tax relief. So, for every £100 you pay in, an extra £25 will be given to you for free. You may be eligible to get even more via your tax code if you are a higher rate or additional rate taxpayer.

You then get growth on this growth through the power of COMPOUND INTEREST.

You can’t access pension money until you’re 55 at the moment and that’s planned to rise to 57 and then 58 in future, but that means if you’re young now the money will be in there to grow for a very long time.

Even if it’s just a small amount monthly, just start! It will enhance what you get through any workplace pension you may be a member of.

The providers I mentioned earlier offer a pension wrapper, with exception of Trading 212.

3. Get an Emergency Fund

Equally important as the first two tips when you’re young is getting an emergency fund. This is just some money set aside in a liquid account for emergency purposes. Emergency means that: It doesn’t mean an emergency trip to Ibiza (as tempting as that may be!)

It might be something health related like an emergency dental appointment, or something urgently needs repairing.

There’s no set amount for how much this should be. As a rule of thumb try to build up 3 months’ worth of expenditure in an account and make sure it’s instantly accessible. This is to be used as a nice comfort blanket, so you know you have covered yourself if an emergency was to arise without getting into debt, which can be a slippery slope.

start investing in an emergency fund

 

4. Get the Right Bank Account

Speaking of accounts another tip is getting the right bank account. Online accounts these days like Starling Bank and Monzo are leading the way with some of their features.

Starling account can be opened in minutes and actually provides a small bit of interest on your balance, which is rare for a current account and both of those companies allow fee free withdrawals abroad.

Monzo is great because it allows you to create different pots for different savings, helps budget you on how much you have left for your monthly spends and notifies you with each transaction made. The best part is you can manage it all within an app on your phone so it’s easy to keep track of what your money is doing.

Avoiding fees is always a winner but also be savvy with bank accounts…

Have more than one to take advantage of special high interest rate deals and cash back rewards such as those with Bank of Scotland and Santander.

You may need to organise payments and direct debits to meet certain criteria, but it’s not rocket science and can be worth it.

I’d highly recommend doing ‘round up’ investing with the Moneybox app as well to make sure your spare change is invested.

 

5. Get A Credit Card

I’ve done a recent video about the virtues of credit cards and it’s something that everyone should have.

From helping to improve your credit score, to giving you better purchase protection to giving you cash back so you actually earn money from your purchases. The right credit card is essential. Open one as soon as you are able to and learn how to manage it effectively. Watch my credit card video here for a more in depth run through on that. Ensure you fully pay off credit card balances every month because left over balances are bad debt, and you want to avoid having any of that.

 

6. Shop Smart and Get Cash Back

Look out for cash back deals not only from your bank account and credit card but through affiliate programmes and rewards sites. You may as well get paid for the things you are going to purchase anyway! The key thing here though is not to spend the cash back, but to invest it. You’ll be amazed at how much those little kickbacks will grow over time.

7. Live Below Your Means, Start Investing The Rest

This is definitely something I should have switched onto when I was younger and I could have put this right at the top of the list to be honest, but I didn’t want to give away all of the value too early on!

LIVE BELOW YOUR MEANS! START INVESTING THE REST!

Don’t spend every last penny that comes in. Always pay yourself first by automating your investments but aim to live on less than what you’re earning. Try to ensure that you don’t just invest at the start of the month, but at the end as well, by investing what’s left over.

It’s hard to do, but if you can master it, you’ll basically win at life!

When you get that first pay rise, don’t rush out to get a better car or phone. Live on what you were earning before and invest the rest. Your aim should be to build your assets to the point that they can produce a passive income. That is what you can then spend on more luxuries!

Think property portfolio that pays rent or stock portfolio that pays dividends.

start investing for growth

8. Know the Real Cost of What You Spend

People say, ‘it’s only a fiver’, ‘it’s only a tenner, it doesn’t matter’. They’re not appreciating the long-term cost of that wastage. Instead of wasting £20 a month, if you invested it and received a compound return of 8% a year, in 20 years’ time those £20s would be worth over £11,500. That’s what you’re depriving yourself of. Always think of the long-term cost of your spending!

 

9. Get Income Protection Insurance

Almost no one does this when they’re young, but protecting your income early is the best time to do it because it’s cheap. You may need to increment the cover when you start earning more. To be honest whatever age you are now, income replacement cover is never going to be this cheap again because it just keeps increasing with age.

The main reason people don’t have income protection is because they think they’ll never need it, but we all know at least one person who’s been off work long term. If you are off work, would you still want to save and invest for your future, retire early and enjoy life? If the answer is yes then you need income protection, because it will pay you monthly a percentage of your earnings, generally tax free, until you can work again.

 

10. Start Investing in Yourself. This is the Investment You’ll Get the Highest Return On

Every successful person never stops learning. They are constantly teaching themselves new skills and giving themselves new knowledge. Whether reading books, downloading courses or joining mentoring programmes, you will only get ahead by doing this.

learn to start investing

Warren Buffett has always said ‘investing in yourself is the best investment you’ll ever make’. As the most successful investor of all time, I think he knows his stuff!

It’s often said that everyone is just one skill away from greatness. It could be learning about how to market yourself or your business online, presentation skills, leadership skills, sales skills. It’s never been easier to find and obtain the knowledge you need, and it’s never been more essential in this super competitive world!

SkillShare has one of the widest online course selections available and you can make the most of a 14 day free trial and 30% OFF an annual membership with my affiliate link HERE.

If you want to start investing small, read my How to Invest £100 A Month Blog for some nifty tips!

Have you got any tips to start investing that I haven’t discussed? Let me know over on my Instagram!

 

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