Why everyone should have an ISA

One thing that has always bothered me is why there are people out there who don’t have an ISA, be it cash or stocks and shares.

Whilst this has become less of a burning issue for me now that we have had the ISA allowance jump from £7,200 (when I first started saving) to £20,000 from next year, you never know what they will do in the future on this. It’s almost like not having a fridge (ok slightly extreme maybe, but…). Now I understand that some people really struggle to find any left over money for savings, but I do believe you can take almost any budget and find an area that could be trimmed back. I phrase this carefully – could. From what I have found in conversations and comments on blogs etc. a lot of people don’t want to. That’s not the same thing.

For me it is just a no brainer. It’s TAX FREE. Anything done in there means you don’t have to count it in your tax return regardless of performance (granted, you can’t take the losses on any stock sales against tax), and you can take any money from it tax free, it grows tax free, the taxman doesn’t even want to know about it (at the minute – whilst it may change, my personal view is that it’s unlikely in the near term at least). You can add money in or take it out at any time, no need to wait until you are 55 (or older).

Even if it’s only £10 a month you want to start with, shove it into something like a Vanguard LifeStrategy fund on a regular scheme. Now granted, that would buy you the equivalent of about 2p a month, at which point most people switch off (the fees take a disproportionate amount of the investment sum). Why bother for the effort of 2p a month? If you are in the position of only being able to save £10 a month, then 2p a month, going up by 2p a month will soon add up, especially with compounding. Think of it as buying yourself a pint in the future… every month… for the rest of your life… without having to do anything!

Everyone needs an emergency fund (unless your monthly passive income is so high you could buy a superyacht every month) of some sort. Whilst current cash ISAs pay an incredibly low level of interest compared to current accounts, I get why people may think it’s not worth it, but why open yourself up to that risk? If you work hard, get other income and increase your earnings you may well live to regret it in the future. Even if you put it in cash ISAs now because you can’t fill your S&S ISA – you may find in years to come you are in a position to fill the ISA, and all of a sudden also build a cash emergency fund outside of your ISA – you can then transfer your Cash ISA into your S&S ISA giving a further boost.

For me, it comes down to how willing people are to make sacrifices. I really do believe that *almost* anyone can find a spare £10, £20 or £50 a month in their budget – the question is if they are willing to make the sacrifice to get that. I hold my hands up – I know I could trim my expenses down by at least 10% of income and add that to savings, but I am not willing to – my choice, and that extra 10% will add years to my retirement date, but again, that’s my choice.

On the assumption that they do, then why not just get a direct debit setup into an S&S ISA – take a Vanguard LifeStrategy fund. If you want to be comfortable, go for the one that pays out, into the ISA, and use that to help build up further savings, or use the accumulation and watch it slowly grow. If you can squeeze say £100 a month, then you can always do both!

Yes it will take a little bit of hassle at first to set up the ISA and direct debit

In those famous words…. JFDI.

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Author: fireinlondon

Fighting the high cost of living in London

6 thoughts on “Why everyone should have an ISA”

  1. I have to say that I ‘wasted’ five years of my ISA allowance because back when I only had a cash ISA (and interest rates were a lot higher), I used the account as my ‘fun fund’, ie dipped into it regularly for all my holiday and social pursuits. It’s only required a bit of planning to be able to both save AND enjoy such pursuits.

    Of my friends/ex-colleagues who I’ve spoken to, only a few have ISAs and all of those cash ISAs only.

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    1. Hi Weenie,

      Thanks for stopping by again! I think its hard, when you first start out then why not dip in you don’t (or at least I didn’t) realise just how important that tax free status is. Lets be honest, £7,200 post tax is a huge amount to save, never mind the upcoming £20,000!

      Yes – its surprising how few people use their ISAs and cash ISAs are such a waste, but people have to take responsibility to learn and utilise the things they have, but I think its partly down to the fact that most people spend, rather than save 😦

      Cheers,
      FiL

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  2. Hi FiLondon

    Just for correction, ISA allowance is jumping from £15 240 to £20 000.

    The superyacht comment reminds me that I have to catch up with my reading on ‘Where are the Customer’s Yacht’s’ – a book illustrating how financial advisers are ‘fleecing’ off investors. Might interest yourself at some point for a Lazy Sunday read.

    Humans are creatures of habit and are extremely fallible. We tend to take the easy way out, spend all the money you have excess to, eat all the food laid out in front of us, etc. I am one myself. I recently got into a habit of going to the gym after years of sedentary life. I hope this keeps up. *Almost* covers a wide spectrum. Now the question is how can we help others start to take those steps to fiscal responsibility? I think it boils down to having insight and being self aware. The alternative is being paternalistic and getting them to do it without question. We need to set the example and spread the story to make others aware.

    -Fireplanter

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    1. Hi FP,

      Thanks for joining in again!

      Sorry if my message wasn’t clear – I meant as of next year the allowance is £20,000, and when I first was really aware it was only £7,200 – but as you rightly say now its £15,240!

      The financial services industry is very much a self centred, however I do want my own yacht 🙂
      As you say – humans are creatures of habit, it is very easy for us to just get used to “this is my income” and not save – it requires an anti-human trait to think 20 years ahead, not something I think we are that well equipped to cope with.

      I hope the FI community is showing what can be done, and I hope people are listening – the fact that we have so many people in their 20’s looking to FI is only a positive thing!

      Keep up the hard work, keep saving and enjoy the future I say – a little wait now and it will pay dividends!

      Cheers,
      FiL

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