Investing vs saving

It’s an interest-ing question (excuse the pun!) and one that needs explaining. In this article, our expert team of independent financial advisers at PIL Southampton explains the differences between investing and saving, their advantages and disadvantages, and what you should consider to best suit you.

One way to compare the two, is to think of savings as your ‘rainy day’ money in case of unexpected expenses or significant spends, and to think of investments as a way of growing your funds for your longer-term future and retirement.

What is saving? 

You are ‘saving’ your money when you deposit it in a bank, building society or credit union account and in return you receive interest on those savings. There are various types of saving accounts, including easy access accounts, regular saver accounts, notice accounts, fixed rate bonds and cash ISAs.

What is investing? 

When you are investing your money, you are placing your money in an investment vehicle. This might be buying units in an investment fund or purchasing stocks and shares in a company that’s listed on a stock exchange.

Investing can give you a higher return than savings, but this higher reward comes with the risk of losing money too. Your capital is not guaranteed, and the value of your investments may go down as well as up

What is the main difference between saving and investing? 

It’s all about risk and reward. The more risk you’re prepared to take with your money, the more money you can potentially make. However, the more risk you’re prepared to take, the more you could potentially lose.

Savings options have no investment risk, but there is a small risk that the financial institution you’re saving with going out of business. If that happens, the first £85,000 of your savings should be protected by the Financial Services Compensation Scheme (FSCS).

Timing plays a part too. If you are going to invest your money, it’s advisable to have a longer-term strategy, to give your investments time to fluctuate and smooth out over a longer period. Savings could be more appropriate for a shorter-term solution, i.e. up to five years.

Pros and cons of saving 

Pros

A big advantage of saving is that your money is protected, it does not go up or down protecting your money. 

It can be helpful to be able to calculate exactly how much money you’ll have at a particular time, due to the interest rates applicable to your savings accounts.

Also, saving is a great way to get children and teenagers familiar with the benefits of putting money aside and seeing their pot grow.

Cons

The main downside of saving your money rather than investing it is the comparably low rates of interest. This can be especially true after the saving account’s more attractive initial rate converts to the standard rate.

Also, there tends to be a correlation between the interest rate you’re offered and the time you’re prepared to ‘lock’ your money away. Generally speaking, the longer you can leave your money untouched, the higher the interest rate will be. 

This might not be convenient if you might need quick and easy access to your money. 

If the interest rate you receive is less than the rate of inflation, then the ‘true’ value of your savings will reduce.

Pros and cons of investing 

Pros

Investing your money, rather than saving it, gives you the potential for higher returns.

There is a wide range of investment categories you can choose from, like stocks and shares, bond funds, property funds, unit trusts, emerging markets funds and ethical investments.

Cons

The potential for higher returns comes with the risk of losing your original capital. There is no guarantee your investment will perform well and yield a positive return.

And, as investments are administered and controlled by fund managers, you will have to pay their fees and charges. These will be deducted from your investment before you see any profit. For example, if your investments see a return of 2% and your management costs are 3%, the value of your investments will have decreased by 1%.

Why do some people prefer to save rather than invest? 

People who prefer to save rather than invest might need to easy access their money, or to be reassured that the value of their nest egg isn’t going to go down if they’re relying on those funds for a future big purchase like a wedding or a mortgage deposit.

They might also like the chance to earn a good return on their savings, with minimal risk, if they can find an attractive interest rate.

How much of my savings should I invest? 

There is no ‘one size fits all’ answer to the question of how much of your savings you should invest. Each individual has their own attitude towards risk, and their own opinion about how much they can afford to lose, or how soon they might need access to their money.

When you are trying to decide how much of your savings you should invest, think about potential scenarios. 

How much money do you need to run your life and pay your bills?

If you had no income for a while, how much money would you need in reserve to maintain your lifestyle? 

Ideally, you would want to have three to six months’ income in readily available savings, in case you need an emergency fund.

Another way to estimate the amount you should keep in savings before you invest is to look at how much you’ve got, then think about what percentage of that you would be prepared to invest and take a bit more risk with. 

Talking your options through with an independent financial adviser, like our experienced team at PIL Southampton, could be really helpful at this point.

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

It’s usually financially wise to pay off loans and credit cards before you save, as the interest you are paying on loans and credit cards are likely to be higher than the return you would get on your savings.

How PIL Southampton can help you 

Our qualified, knowledgeable, and friendly team of independent financial advisers is here to discuss your options. Considering what your needs are ‘around the corner’ and your longer-term goals, they can help you find the right balance for you between saving and investing. 

How you can contact PIL Southampton

You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.