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Saving vs investing

07-Nov-2018

Time to read: 4 minutes

Save or invest? Invest or save? It's easy to end up going around in circles when trying to decide on the best way to grow your money. This clear and concise guide can help you get to grips with the basics of both so you can work out which is right for you. 

Often the best way to make an informed decision is to take a step back. Let's forget the detail for a moment and simply focus on what they are and what you want from your money. In a few minutes, the choice between whether to save or invest should become a lot clearer (spoiler alert: the right answer is often a combination of the two).

What is saving?

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 account, you can get back what you put in – plus the interest you've earned – whenever you want it.

Aside from accessibility, perhaps the biggest benefit of saving is it's safe. 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 have been low for years so the return you'll get on your money will be very modest. The risk is it won't beat inflation. 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.

What is investing?

Like saving, investing is also setting aside money for the future. There are many 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 putting your money into something you believe will go up in value over time. Here, you're exposed to a different type of risk – exposure to the markets – and this means 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. 

This is why 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.

Which one is right for you?

It's really more a question of which combination is right for you. Of course, life is filled with lots of different needs and aspirations. So the chances are you've got more than one goal that you'd like to put your money towards. 

A good place to start is by working out how much you can afford to put away each month. When you have a figure in mind, you can think about how to divide it up to make sure you have money for different periods of your life. How you choose to do that will depend on your age and priorities. 

It's helpful to split your money among several pots:

Unexpected things that could happen who-knows-when
Before you save for anything else, you should first build up an emergency fund that you can fall back on in case something goes wrong. This should be in an easily-accessible savings account.
 

Things you plan to do within the next 5 years
For money you'll need in the short-term, perhaps for a deposit on a house, saving makes sense because if you invest for under 5 years, your investment may not have enough time to make up any fall in value.
 

Things you plan to do within 5 to 10 years

For medium-term money, maybe to pay for a child's wedding, saving could make sense – although if you're prepared to take some risk, investing could earn you a greater return on your money.

Things you want to do at least 10 years from now
For money you're not going to need for years, such as for a place to retire to, taking a degree of investment risk could earn you a greater return – because with saving the value of your money will get eroded by inflation over time.

The golden rule?

Save for what's around the corner and invest for the future.

We're here to help you. Find the answers and while you're at it, tell us how we could do better.