Saving versus Investing

Key takeaways

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

• Assess your comfort with risk and immediate cash needs

• Investing is suitable for long-term goals whereas savings are ideal for immediate cash access

• Prioritise clearing high-interest debts before saving to avoid larger interest costs than potential savings returns

If you have a lump sum of cash spare every month but are not sure what to do with it, then you’re likely to have considered a savings account or investments. But which one is right for you?   

Savings might seem safer, but the interest rate could be very low. Plus when inflation is high this erodes the value of your deposits.   

Investments might promise greater returns, but what about the risk involved with stock market investing? Here we outline the differences between saving and investing to help you make the best decision about how to save for your future. 

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 and cash ISAs. All operate in a slightly different way, but unlike an investment your money (the initial capital you put in and the interest you earn) is not at risk. 

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. The value of your investments is likely to fluctuate and could go down as well as up. 

What is the main difference between saving and investing?

The main difference between saving and investing is the potential risk and reward you are taking on. A savings account tends to have very little risk which is good for short term goals – unless the bank goes bust in which case the first £85,000 of your savings should be protected by the Financial Services Compensation Scheme (FSCS).   

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 always come with a warning, and investment advisers always tell customers to spread their investments across different asset classes (to spread the risk) and also invest for the long term to smooth out any fluctuations in performance. 

What are the pros and cons of saving money?

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

Advantages:

• Your money is protected and you’re unlikely to receive less than you put in (although inflation can erode the value of your deposits over time)

• You’ll often know exactly how much you’ll get back after a given period (for example with fixed rate savings) 

• It’s a great way of teaching savvy savings habits to children and young people

Disadvantages

• Savings rates can be low, and even high initial rates may drop after 12 months

• The best rates are generally available for those prepared to lock their money away for a longer term (in fixed rate bonds or notice accounts for example) 

What are the pros and cons of investing?

Advantages

• The potential for higher returns and profits in the longer term

• Lots of choice as to where to invest and different types of investment categories, such as stocks and shares, unit trusts, bond funds and property funds, ethical investments and emerging markets funds 

Disadvantages

• You could get back less than you put in if the investment performs poorly

• Fees and charges can be high and will eat into profits 

How much of my savings should I invest?

It depends on your attitude to risk and whether you believe you’ll need to use those savings in the short term.

Try to stress test your finances. Work out the cost of running your home and lifestyle. How would you cope if you didn’t have any income for say the next three months? This can give you an idea of how much money it’s good to have in a savings account (an emergency fund) and you could consider investing the surplus.

Another way is to decide on a percentage of your savings pot that you’re prepared to invest – or take a bit more risk with. If you’re uncertain, it might be worthwhile seeking the help of an independent financial planner.

Is saving or investing best for me?

Investing your money could be a good option for you if…

• You’re investing for long-term financial goals and prepared to ride out any market volatility

• You won’t need the money in the short term

• You can spread the risks over a variety of different assets 

• You can find investments to meet your appetite for risk

• You can research the investment and you’re happy with the fee structure  

• You’re a high earner and can use specific types of investment to give you tax relief

Stashing your money in a savings account could be a good option if...

• You may need quick access to your cash. You’ll need an easy access savings account, for example 

• You want to remove any risk ahead of using your savings for making a big purchase, such as putting down a house deposit, for example

• You don’t like the idea of the value of your savings falling at all

• Savings interest rates are high so you can earn a good return on your savings with low-to-minimal risk

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

It might be difficult to decide whether to clear debt first or to start saving. Saving and repaying debts are a good way to get your finances into shape. So, if you’re stuck between saving and clearing debt it may be best to sort your debt out first.

You might’ve accumulated debt from your credit card or taking out loans and it’s important to clear them. This is because you’d usually pay more interest on your debt than you would earn interest on your savings. So, tackle your debts first before they rise and once you’ve paid them off you can strengthen your savings. 

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