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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When it comes to the concepts of saving and investing, the distinction lies in how you allocate your money and the goals you aim to achieve. Saving involves setting aside money for future use, preserving it in accounts like easy-access savings accounts, where the principal amount is relatively secure but might not grow significantly due to low-interest rates. Investing, on the other hand, entails putting money into vehicles like stocks or funds with the intention of generating profits over the long term, albeit with higher risks due to market fluctuations.
Let's break down the key ideas from the article:
Saving
- Definition: Setting aside money for future use instead of spending it immediately.
- Low Risk: Savings are generally considered safer due to protection schemes like the FSCS, ensuring compensation up to a certain limit if a financial institution fails.
- Interest Rates: Fluctuating interest rates impact savings' growth potential, potentially causing returns to be lower than inflation rates, thereby reducing the purchasing power over time.
- Time Horizon: Ideal for short-term goals or emergency funds (easily accessible savings).
Investing
- Definition: Allocating money into vehicles like stocks or funds with the aim of long-term profit.
- Higher Risk: Investments are subject to market volatility, meaning the value of the investment can fluctuate, leading to potential losses.
- Diversification: Investing can involve a variety of assets, such as shares or managed funds, managed by experts to spread risk.
- Time Horizon: Suited for long-term goals (e.g., retirement) as longer timeframes allow for potential recovery in case of value drops.
Determining Your Approach
- Combination Approach: Consider both saving and investing based on different financial goals, with savings for short-term needs and investing for long-term objectives.
- Budgeting: Creating a budget helps in determining how much money can be allocated to savings or investments.
- Timeframes: Allocate funds based on the time horizon for different goals - emergency funds, short-term needs, medium-term plans, and long-term objectives like retirement.
In essence, the golden rule proposed - saving for immediate needs and investing for the future - highlights the importance of a balanced financial strategy that aligns with your goals and risk tolerance.
