Rachel Reeves wants you to invest your money as well as save it – and the government is launching a campaign to get more people putting spare cash into the stock market. The UK Chancellor has unveiled plans to target cash savers in low-return accounts with offers to instead divert their money into stock market-based investments.
Both saving and investing have an important role to play, depending on your circumstances, goals, age and other factors. By cash savings, we generally mean bank or building society accounts that can be accessed either immediately or at short notice. But while cash savings are perceived as safe, the low interest rates on offer mean the value of your money can be eaten away over time by inflation.
Investing, on the other hand, means putting your money into stock market-based products with the aim of achieving more growth over the long term. The trade-off here is that the higher the reward on offer, the higher the potential risk. Here, we look at the main distinctions between saving and investing and explain the advantages of investing over traditional saving methods.
What is saving?
Saving refers to setting aside a portion of your income for future use, typically in a safe and easily accessible bank or building society savings account. The primary purpose of saving is to build an emergency fund and cover unexpected expenses, providing financial security and a safety net during challenging times. Saving is generally low risk, but it may yield minimal returns compared to other financial vehicles.
Pros
Emergency fund
Saving creates a financial buffer to handle unforeseen events like medical emergencies, car repairs, or temporary job loss, reducing the need to borrow money and go into debt.
Liquidity
Savings accounts offer easy access to funds, making them ideal for short-term goals and immediate cash needs.
Security
Since saving is relatively low risk, it helps preserve the value of your money and protects it from market fluctuations.
Peace of mind
Knowing that you have a safety net in place can alleviate financial stress and provide peace of mind.
Cons
Inflation
Cash accounts that pay interest above inflation are rare, and most savers are in accounts that pay less than inflation. In other words, inflation will likely be eroding the value of your cash savings over time.
Low returns
Cash accounts are very unlikely to generate significant growth over time, even when they beat inflation.
Limits
Many accounts come with restrictions, such as only allowing a certain amount to be invested or offering the best rates only to either existing or new customers.
What is investing?
Investing, on the other hand, involves allocating money into various assets, such as stocks, bonds, real estate, or funds, with the expectation of earning a return over time. Unlike saving, investing carries a higher degree of risk but offers the potential for higher returns and long-term growth.
Pros
Wealth accumulation
Investing allows your money to work for you and has the potential to outpace inflation, leading to substantial wealth accumulation over time.
Beat inflation
Investing in assets that outperform inflation helps maintain the purchasing power of your money in the face of rising living costs.
Long-term goals
Investing is instrumental in achieving long-term financial goals such as buying a home, funding education, or securing a comfortable retirement.
Compound interest
The power of compound interest allows your investment returns to generate more returns, leading to exponential growth over time.
Diversification
By spreading investments across different asset classes, investors can mitigate risks and increase the chances of overall portfolio growth.
Cons
Affordability
If you have debts to repay and/or you’re struggling to pay for essential household bills and products, investing isn’t your priority.
Risk
You need to be comfortable with at least some level of risk in order to achieve investment rewards. But if the thought of your money losing value – even temporarily – keeps you awake at night, investing might not be for you. We have more on risk and reward in investing.
Expertise and time
With so many options to choose from, knowing where and how to start can be daunting, especially if you don’t have a financial adviser.
Costs
While cash accounts don’t have charges, investment products usually do, while you’ll usually pay an additional charge if you use an investment platform. To find the lowest cost platform for you, use our free comparison tools!
Can – or should – I save and invest at the same time?
While investing offers the potential for higher returns, saving plays a crucial role in supporting your investment journey. Building a solid foundation of savings ensures that you have an emergency fund to fall back on during unforeseen circumstances, allowing you to avoid tapping into your investment accounts prematurely. Without an emergency fund, you might be forced to sell investments at inopportune times, potentially locking in losses.
Moreover, having savings can provide you with peace of mind and a sense of financial security, enabling you to take calculated risks when it comes to investing. Feeling financially stable can help you make rational investment decisions, avoid impulsive actions, and stay committed to long-term strategies.
On the other hand, investing offers the potential for growth and wealth accumulation over the long term. For example, if you’d put £10,000 in a typical cash ISA 10 years ago it would be worth £11,513 today, compared with £17,999 if instead you had invested in a FTSE All Share tracker fund, according to AJ Bell.
Have your cake and eat it
In other words, the best approach, where possible, is to enjoy the best of both worlds and maintain a cash savings reserve while also investing for the longer term. Establish an emergency fund first, ideally covering three to six months’ worth of living expenses. Once you have a solid safety net, start investing with a long-term perspective, considering your risk tolerance and financial goals.
These days, getting the most from your investments includes using a platform that best meets your needs. Use our free comparison tools to find the right one for you, and browse through the many articles on our website that can help you on your investing journey.
These are a good place to start:
How to invest in stocks and shares: 10 key pointers
Five simple rules for investing
How to build an investing mindset
