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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How To Invest 100 a Month For FAST GROWTH As a BEGINNER

How to Invest £100 for the BIGGEST return!

 

If you’re looking for tips on building wealth and gaining financial freedom via investing – you’re in the right place.

Today’s blog is another essential one for investment beginners because it focuses on how to invest just 100 a month. 100 dollars, 100 pounds, 100 euros, the currency doesn’t matter…

This blog focuses on fresh ideas from a new perspective you won’t have heard before. It’s not just repeating what a hundred other blogs or YouTube videos have said to you before.

I want to inform you of easy steps that anyone can do to make their money grow from as little as £100 a month.

money growing how to invest

Firstly, let’s recap the basics of how to invest.

Let’s look at the basic, then come at this from a slightly different angle. What I ultimately want you to achieve is not only a better understanding of investments, but the mindset and headspace required to accelerate your investments and wealth. That will ultimately lead to you getting out of the rat race, retiring earlier and enjoying a more fulfilling lifestyle.

So, the basics! If you are looking to get your money to grow, it needs to be put to work in real assets that can produce growth. That would be things like stocks, bonds and property.

To put it bluntly, you will never become financially free by just saving into a bank account. As Robert Allen famously quoted, “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case!”  In the UK at the moment the bank of England base rate is 0.1%, the Fed funds rate is 0.25% and the ECB refinancing rate is 0%. Through this you can see why banks aren’t paying a return.

A little trick to working out how long it will take to make your money double is using the RULE OF 72. All you need to do is divide the number 72 by the rate you are receiving. That will tell you how many years it will take your money to double.

So, if you’re getting 0.50% on a regular savings account at the moment, which is about as good as you’ll get, it would take 144 years for £100 to double!

No one has 144 years, so If that is what you’re doing currently – YOU NEED A NEW STRATEGY!

So where should you invest the money?

The most simple and straightforward thing to do would be to set up an account with an investment company like Vanguard. (There are many other options, but the Vanguard process is very simple.) Here you can choose to invest into tax efficient wrappers like an ISA in the UK, or I believe a Roth IRA in the US. These will shelter the gains you make from tax.

When you’ve set up those wrappers, you can choose to invest into broad index funds or ETFs. These ETFs will allow you invest into the global stock market and spread your money across thousands of companies. This will make your investment is highly diversified. Spreading your investment reduces risk. This type of strategy has proved to be a good long-term way of achieving high growth.

If you achieved 8% a year return, (which historically has been about the average return of the US stock market allowing for inflation) your 100 pound or dollar investment would take 9 years to double.

Vanguard Logo

Now for the not so obvious…

Let’s look at some ways of investing £100 for the BIGGEST and QUICKEST return. This is so you’ve actually got more than £100 to invest in the first place.

Some of this may sound counter-intuitive, but hear me out…

The most valuable commodity of all, is time. When we invest, we essentially do it to purchase more time to enjoy ourselves without the shackles of work and bills curtailing our enjoyment. Think how much time you have in the week and how you spend it. When you take away sleep and you take away work, you’re left with less than a third of your day.

There’s a very simple equation that I want you to keep in mind. This is the most powerful equation in the universe because it is the key to a happy life: Time + Money = Lifestyle. I’ve said before that having a good lifestyle is the reason we all work hard every day. However, without time AND money the equation is incomplete. If you’ve got lots of one and none of the other, you won’t have lifestyle.

How Do You Get More Time to Invest?

So, if 100 is all you’ve got to spare to invest at the moment, that might be better spent on trying to free up more time. This time can then be invested into gaining more money. Do you really want to be spending your free time every day doing cleaning, ironing, food shopping, gardening, cooking?

What you could do instead is use your budget to buy some of that help in. There are websites like Task Rabbit and Airtasker, where you can hire people to do practically any odd job that you need. £100 a month won’t cover everything, but you might be able to eliminate some of your least favourite tasks to free up more time.

get spare time to learn how to invest

Here’s the key thing though; you must INVEST THAT TIME into something useful! Learn a skill that you can do that can make you money. Don’t just waste the time having a nap or watching the TV (as tempting as it can be). In reality, if you want a good lifestyle, you have to hustle for it and move smart.

For example, you want to create a small drop shipping business or how to make money with affiliate marketing, blog writing or even a combination of all of those things. You can do short courses on all of them on sites like Skillshare (GET 30% OFF YOUR FIRST YEAR PREMIUM HERE) and Udemy. You can access tons of courses to really give you the expert knowledge that you need to get started in creating and marketing a little side hustle. This way you can complete a number of courses before you even have to pay anything.

 

To sum beginning your investment up…

That is how I would use the 100 dollars or pounds or euros first. Free up some valuable time by outsourcing some time-consuming tasks. I’d then invest that free time and any money left over into teaching myself new skills. I’d then use those skills to multiply the money available to invest. I’d invest that money initially into tax efficient, stock market instruments to accelerate the building of wealth. When I became more adept at that I’d look to other investment opportunities to accelerate my wealth even faster, but that’s for another blog… make sure you stick around so you don’t miss it!

Here’s a Thought…

Sometimes the best, most savvy ideas are the simplest one.  A little online buying and selling business can be profitable. For example, one of the best videos I’ve seen on this recently is Ryan Pineda’s couch flipping video…

What he basically did is find an item, in this case leather couches, that people were trying to get rid of. In their haste to get rid of them so they could get their shiny new sofa, they under-priced them. Ryan then bought them, tidied them up if necessary, and sold them for a higher price.

Ryan Pineda Couch Flipping Thumbnail

He turned that simple idea into a business that generated income of over $100,000 a year. There’s nothing stopping you from doing the same thing.

On sites like Gumtree and Facebook Market Place, people are literally giving things away for free. This is quite often just because they want to get them out of the way, not because there’s anything wrong with them.

You could definitely convert those free items into cash. It just takes a bit of time, planning and perhaps a touch of marketing prowess. These are all things that can be bought or learned.

So, it may not be what you expected and it may take some hard work, but all the best things in life do! It is all about being creative and finding innovative ways to free up that time so you can earn more money and invest for the lifestyle you desire.

Let me know if this has helped you and if you have any ideas/stories of creative ways you have earned some extra pounds! You never know who you could inspire.

 

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