Is it better to save or to invest your money? Each can support your financial wellbeing and future goals, but in different ways. We look at the differences, the pros and cons, and what it means for you and your family
Savings and investments are different but complementary ways of funding your future.
Cash savings are ideal for a rainy-day fund or to pay for a short-term goal. Investments are for the long term and will require more risk. Creating the right balance between saving and investing is the heart of a well-balanced financial plan. We’re here to help you work out the right mix for you so you can achieve your goals. When we talk about saving and investing, we generally think of them as the two main ways to set money aside for the future. It can be easy to confuse them as one and the same thing – or think that you should opt for one or the other.
In fact, they’re two quite distinct options that you have for aiming to grow your money for your future. The first step to understanding the difference is to ask yourself a series of questions, including:
How much should or could I put aside?
How soon might I need it?
Where should I put it?
What do I want that money to do for me and my family?
By answering those questions first, you’ll be able to decide how much of your money you should be saving, and how much you might want to invest. It’s important to understand the difference.
Why should I save?
Saving and investing money for later life are similar behaviours, but people can approach these tasks with different mindsets. Saving is rooted in the ‘here and now’. Our current circumstances, income and outgoings, dictate how much we can save in regular contributions. But saving means accepting that there’s a trade-off between a likely lower rate of growth, and the reassurance that you’ve got a cash ‘slush fund’ handy should you need it at a moment’s notice.
Cash – money for the near future
Broadly speaking, saving is about putting money aside in the short-term, for the short-term – whether it’s a ‘just-in-case’ fund, to cope with those unexpected car repairs, and boiler breakdowns or something specific, such as a family holiday, or a new kitchen. Whatever you’re saving the money for, it is usually best to ensure at least a portion of your money is in a cash account with no restrictions on withdrawals so you know you can get your hands on funds at short notice if you need to. Instant or easy-access cash savings are a vital part of your financial resilience. Financial advisers recommend keeping three to six months’ salary of ‘emergency’ money in cash. If you’re paying in regularly, and you haven’t looked to see how much money in you’ve got in your savings or even current accounts, you may want to check. Too much money sitting in cash accounts isn’t always working as hard for you as it could be.
Investing for the long term
Saving for long-term goals is where investments come into play. Investing in things like stocks and shares, or bonds – and leaving the money untouched for ten to fifteen years or more – means it has the potential to grow into a bigger sum than it would in a cash account. Investing money for a comfortable retirement is a good example – we don’t know the final figure we’ll need for the future, since we don’t know how long we’ll live. But we definitely plan to retire one day – and investing for that day is a long-term financial strategy. However, investing means you’re accepting more risk with the money you put in, since the markets may rise and fall – and so may the value of your investments. But the ups and downs of markets typically even out over the medium to long term (five years or more). And the greater growth potential means your money can benefit from the ‘snowballing’ effect of compounding too.
Why choose investing?
Stock-market-based investments tend to produce greater growth over the long term due to the risk-reward relationship – by accepting more risk, we have the potential to receive more reward. And we can choose the level of risk we feel comfortable with, by making informed choices about where to invest, and what type of investments to choose, such as bonds and equities. Investing gives you more control over where your money is, and more choice.
Can I reduce the risk of investing?
In general, investing in the short term (i.e. for three or four years) carries a higher risk than investing for longer-term objectives, since there’s less time for an investment to recover value if the market falls. Over the longer-term, investors can ride out market volatility more confidently. Cash saving is a more cautious option, but the returns, although often lower, are more guaranteed. You have a number of options to reduce your risk and make sure you don’t risk more than you’re comfortable with – mainly by spreading your investments across different types of assets. This principle is known as diversification.
Financial advice can give you the best of both worlds
This is where speaking to an adviser can help you understand your short, medium and longer-term goals, and consider the right balance of saving and investing for you. Ideally, most of us would save for the short term and invest for the medium term (up to five years) and long term, ultimately boosting our confidence in our long-term financial security. We now recognise that feeling financially confident is a vital part of our wellbeing. A strong, diversified financial plan can help you feel secure and empowered throughout your life.
Adapted from: SJP
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