Should I invest my money or save it?

Key takeaways

• Savings offer low risk but potentially lower returns, while investments offer higher potential returns with associated risks

• Your choice should depend on when you need the money, your attitude to risk and your ability to cope with losses

• Investing is generally more suitable for long-term goals, while savings are useful for money you may need in the next few years

• Aim to keep three to six months' essential living costs in an easy access savings account as an emergency fund

• Paying off high-interest debt will often make more financial sense than saving or investing

Should I save or invest?

Whether you should save or invest depends mainly on when you’ll need the money, how much risk you’re comfortable taking and whether you could afford to lose some of your initial investment.

If you have a lump sum, saving can be a good option for short-term goals and money you need to keep readily available. Investing can offer greater potential returns over time, but the value of your investments can fall as well as rise.

A useful rule of thumb is to think about your financial goals in terms of time:

• Short term – less than five years: saving is generally more suitable, particularly if you’ll need the money on a specific date

• Medium term – five to 10 years: you may consider a mixture of saving and investing, depending on your circumstances and attitude to risk

• Long term – 10 years or more: investing may be suitable if you can accept that the value of your money will fluctuate

There are no hard-and-fast rules, though. Your circumstances and ability to cope with a fall in value are just as important as your investment timeframe.

What is saving?

Saving is when you put your cash into a savings account run by a bank, building society or credit union and are paid interest in return. Savings accounts come in a variety of forms such as:

• Easy access

• Regular saver

• Notice accounts

• Fixed rate bonds

• Cash ISAs

All operate in a slightly different way, but your savings are not exposed to investment market movements. Eligible deposits with a UK-authorised bank, building society or credit union are protected by the Financial Services Compensation Scheme (FSCS), subject to its limits and eligibility rules.

How is interest on my savings taxed?

Interest from most savings accounts is taxable, although many people can earn some interest without paying tax on it.

Your Personal Savings Allowance means basic-rate taxpayers can usually earn up to £1,000 of interest a year tax-free, while higher-rate taxpayers can usually earn up to £500. Additional-rate taxpayers do not have a Personal Savings Allowance.

Interest earned in an ISA is tax-free, so a cash ISA can be useful if you want to shelter your savings interest from tax.

The amount of tax you pay will depend on your circumstances and your other income.

What is investing?

Investing is when you put your money into an investment – such as buying shares in a company listed on the stock market, or buying units in an investment fund.

The hope is that your initial investment will grow in value over time and give you a better return than from a savings account. However, the value of your investments is likely to fluctuate and could go down as well as up.

Unlike cash savings, there is no guarantee that you’ll get back the amount you originally invested.

What is the main difference between saving and investing?

The main difference between saving and investing is the balance between risk, potential returns and access to your money.

A savings account tends to have very little risk and can be suitable for short-term goals, particularly where you need certainty about how much money you’ll have available.

In contrast, investments can go up and down in value. So, while you may make more money by investing, there is also a risk to your initial capital.

This is why investments are generally more suitable for people who can leave their money invested for the long term and accept some fluctuations in value. Spreading your money across different investments can also help reduce the risk of relying too heavily on one investment.

What are the advantages and disadvantages of saving money?

There are a range of pros and cons to savings. Here are some things to consider:

What are the advantages and disadvantages of investing?

There are also pros and cons to investments, including:

How much of my savings should I invest?

Before investing, make sure you have enough accessible cash to cover unexpected expenses.

A useful benchmark is to keep around three to six months' essential living expenses in an easy access savings account as an emergency fund. The right amount will depend on your circumstances, including how secure your income is and whether you have major expenses coming up.

Once you have an emergency fund in place, you could consider investing money you are unlikely to need in the short term.

It is also important to think about your capacity for loss, as well as your attitude to risk. You may be comfortable with the idea of investments falling in value, but that does not necessarily mean you can afford to lose a significant amount of money.

If you’re uncertain, it might be worthwhile seeking the help of an independent financial adviser.

How much should I budget for saving or investing?

Start by working out what you can realistically afford to put aside each month after paying your essential bills and other regular expenses.

A budget can help you see where your money is going and identify an amount you can comfortably save or invest without leaving yourself short.

You don't have to start with a large amount. The minimum amount you need will depend on the savings account or investment platform you choose, so check the terms before opening an account.

The important thing is to choose an amount that is sustainable rather than committing to more than you can comfortably afford.

How much do I need to start saving or investing?

There is no single minimum amount needed to start saving or investing.

Some savings accounts can be opened with a very small initial deposit, while others require a larger amount. Investment platforms also have different minimums, with some allowing regular investments from relatively small amounts.

If you are new to investing, starting with a manageable amount can help you get used to how investments work without committing more money than you can afford to lose.

Is saving or investing best for me?

Struggling to figure out which option is right for you? Consider the following:

Can I save and invest at the same time?

Yes. Saving and investing don't have to be an either-or decision.

You could keep money in savings for short-term goals and emergencies while investing money you won't need for several years.

For example, you might keep your emergency fund and money for a planned house deposit in savings, while investing separately for a long-term goal such as retirement.

Splitting your money into different pots can help you match your choice of savings or investments to when you expect to need the money and how much risk you are prepared to take.

Should I save, or pay off loans and credit cards?

It will usually make more financial sense to clear high-interest debt before building up savings or investing, because the interest you pay on borrowing can be higher than the interest or investment returns you could earn.

You might’ve accumulated debt from your credit card or taking out loans and it’s important to consider the cost of this borrowing.

There can be exceptions. For example, you may want to keep some emergency savings rather than using every penny to clear debt, and some borrowing may have a particularly low interest rate.

But if you're paying a high rate of interest on credit card or loan debt, prioritising this debt can often give you a better guaranteed saving than the potential return from putting the same money into savings or investments.

Once you've paid off expensive debts, you can put more money towards your emergency fund and longer-term financial goals.

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