Have you asked yourself the question, "Should I save or invest?".
Here, we look at both options to help you work out which one is right for you.
Saving is setting aside some of your money for the future. 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.
Saving is also a safe option. Under the Financial Services Compensation Scheme, if a UK bank or building society that 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 is getting eroded over time. In other words, it will buy you less.
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, and they usually involve some sort of charges or fees. Perhaps the most well-known are shares – where you buy a tiny slice of an individual company, and funds – where you buy into a ready-made basket of investments that are managed for you by an expert.
With investing, 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 could get back less than you put in. Your expected returns can also fluctuate and are not guaranteed.
Ideally, you should 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 you'll want access to your money, you can manage the risk that 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 saving account.
Is investing worth the risk? Our guide can help you to decide.
If you have more than one goal that 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).
A good place to start is by working 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:
Before you save for anything else, you should first build up an emergency fund to fall back on, in case something goes wrong. This should be in an easily accessible savings account.
For money you'll need in the short-term, such as a home deposit – saving makes sense. Investing for less than 5 years may not be enough time to make up any fall in value.
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.
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.
Save for what's around the corner and invest for the future.