Individual Savings Account (ISAs) can help build long term wealth for the everyday investor, even for beginners. There are a number of different types of ISAs to invest in, from Fixed Rates to Stocks and Shares to Cash, but each will be more suitable for different individual needs.
On the Damien Talks Money YouTube channel, the personal finance content creator explained some of the top mistakes he sees people making with their ISAs.
ISAs are a great way to build wealth as they protect people’s investments from tax.
Britons can only pay into one type of each ISA in a financial year.
Damien said: “I constantly see people making mistakes with these accounts and costly ones at that.”
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People are “far too cautious,” he added.
A total of 37 percent of adults have savings in a cash ISA, despite inflation being on the rise.
Inflation is destroying the purchasing power of cash at the minute so locking one’s hard earned cash away at three percent when inflation is running at least 10 percent means people are “just effectively going backwards”.
He said: “Building long term wealth through the use of a cash ISA is far too cautious, in my opinion.
He said: “There are two main contributing factors to the overall success of one’s portfolio.
“How much money you put in and how long you leave it for.
“It is true that you can always put more money in, if you take £2,000 out, you can always put it back in down the line to catch back up but you are never getting that time back.”
A study from Vanguard found that if someone starts investing £262 each month from 25, by 65 they would have around £500,000 assuming six percent annual returns.
The same research found that if someone started at 35, they would have to put in £514 each month, just to get the same £500,000.
The 25-year-old would invest £125,000 to get the £50,000, where’s the 35-year-old would invest £185,000 just to play catch up.
Damien said: “Time is the difference here, that is the power of compounding.
“People need to realise that if you take money out of your ISA, it’s not only the cash that is going, but the time as well.
“It’s an infinitely more scarce and precious asset than money.”