The Importance of Saving in a Cash ISA

In the United Kingdom, one of the best investment vehicles that available to all residents is the so-called ISA or Individual Savings Account. Its an incentive by the government to encourage saving and help people build on their retirement nest egg. As one of the countries with the highest average credit card debt, saving is a very important part of the economy and with the recent global financial crises the problem was again highlighted.

The main reasons why ISA's are so attractive is the fact that its a tax free saving. There are some strict limits on the amount that you can save in any give tax year (and it changes annually), but for that amount you don't even have to declare your savings to the IRS.

In any ISA you are allowed to invest both cash and stocks or if you choose to you can invest the full allotted amount in stocks. The cash component is quite small, but its definitely not something you should take for granted. If you keep adding it up year after year, that's when it starts making sense.

While stocks can yield much higher returns, the cash component of your ISA can be a very good investment. Many people leave their savings in a normal bank account, but what they don't realize is that fees and tax eat up virtually all that interest. By simply leaving the same amount in your ISA, you get the benefit of a higher interest rate as well as the benefit of not paying tax on your interest.

What makes a cash ISA even better is that you can get access to the money if you desperately need it. With stocks its not that easy because being forced to sell certain stocks at the wrong time can be a bad investment decision. Saving your money in an ISA is smart. Its simple and is something that you really need to look into if you are serious about saving and your retirement.

Read more about Individual Savings Accounts and read my write up of the best cash ISA.