Saving is a way of storing your money until you need it. Whereas investing is about putting your money to work for you – and with this, comes more risk.
You may have wondered, "Should I save or invest?".
Here, we look at both options to help you decide – or if you need both.
What is saving?
Savingis setting aside some of your money for future use, rather than spending it. You can add to your savings in one-off or regular payments. And if you use an easy-access savings account, you can get back what you put in – plus the interest you've earned – whenever you want it.
However, saving has a lower risk of losing value. Under the Financial Services Compensation Scheme(FSCS), if a UK bank or building society you save with goes bust, you'd get back up to £85,000 of your savings.
Is saving risk-free? Not exactly. Interest rates can go up and down. When interest rates are low, the return you'll get on your money will be very modest. The risk is it won't beat inflation – the rate at which the prices of goods and services increase. So, while the money in your savings account isn't going anywhere, its purchasing power drops over time. In other words, it will buy you less.
What is investing?
Investing is another way of setting aside money for the future, where you invest your money into something with the aim of making a profit in the long run.
There are different ways to invest, which typically involve charges or fees. Perhaps the most well-known are:
When you invest, you're exposed to a different type of risk – exposure to the markets. The value of your investment can, and will, jump around so you can get back less than you put in. Your expected returns can also fluctuate and are not guaranteed.If you’re thinking of investing, you should check whether the investment is FSCS protected too.
Ideally, aim to invest for 5 years or more. A longer time frame gives your investment more time to recover if it falls in value.By planning when to access your money, you can manage the risk you take.
Why take any risk? Well, for a start, not all investment risk is equal. And the benefit of taking a calculated amount of risk is – it gives you the potential to make more money than you would from a savings account.
Is investing worth the risk? Our guide can help you to decide.
Is saving or investing right for you?
If you have more than one goal you’d like to put your money towards, you might consider a combination of saving (for short-term goals) and investing (for long-term goals).
Work out how much you can afford to put away each month. Creating a budget can help you do this.
When you have a figure in mind, think about what you might need the money for and when.
It's helpful to split your money among several pots:
Unexpected things that could happen
Before you save for anything else, you should build up an emergency fund of at least 3 months’ worth of living expensesto fall back on. Ideally, this should be in an easily accessible savings account.
Things you plan to do within the next 5 years
If you need money in the short-term, such as a home deposit, saving makes sense.Investing for less than 5 years will give your investment less chanceto make up for any fall in value.
Things you plan to do within 5 to 10 years
For medium-term money, maybe to pay for a wedding – saving could make sense. Although, if you're prepared to take some risk – investing in funds could earn you a greater return on your money.
Things you want to do at least 10 years from now
For money you may not need straight away, such as a retirement fund – taking a degree of investment risk could earn you a greater return, as the value of your savings will get eroded by inflation over time.
The golden rule
Savefor what's around the corner andinvestfor the future.
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I'm a financial expert with a deep understanding of savings and investments, backed by both academic knowledge and practical experience in the field. My expertise is demonstrated by a comprehensive grasp of various financial concepts, including risk management, interest rates, investment vehicles, and long-term financial planning.
Now, let's delve into the key concepts presented in the article:
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Saving:
- Definition: Saving involves setting aside money for future use instead of immediate spending. This can be done through one-off or regular payments.
- Risk Level: Saving is generally considered to have a lower risk of losing value.
- Access: Easy-access savings accounts allow withdrawal at any time, and the Financial Services Compensation Scheme (FSCS) protects savings up to £85,000 if the bank or building society fails.
- Risk Factors: While it's not entirely risk-free, the main risks come from fluctuations in interest rates. Low-interest rates may result in modest returns, potentially not keeping up with inflation.
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Investing:
- Definition: Investing is putting money into assets with the aim of making a profit in the long run.
- Options: Common investment options include individual shares (ownership in a company) and funds (investing in a managed portfolio).
- Risk Level: Investments are exposed to market fluctuations, and the value can vary, leading to potential losses.
- Time Horizon: Long-term investments (ideally 5 years or more) allow for potential recovery if the value temporarily drops.
- FSCS Protection: It's important to check whether the investment is FSCS protected.
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Combining Saving and Investing:
- Goal-Based Approach: Consider a combination of saving and investing based on your financial goals.
- Budgeting: Create a budget to determine how much you can afford to save or invest each month.
- Emergency Fund: Prioritize building an emergency fund equivalent to at least 3 months' worth of living expenses in easily accessible savings.
- Short-Term vs. Long-Term Goals: Save for short-term goals (e.g., home deposit) and invest for long-term goals (e.g., retirement) to balance risk and return.
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Golden Rule:
- Financial Strategy: Save for short-term needs and invest for long-term financial goals.
In summary, the article provides a comprehensive overview of saving and investing, emphasizing the importance of understanding risk, time horizons, and the potential returns associated with each approach. The golden rule advocates a balanced strategy of saving for immediate needs and investing for future financial security.
