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What is the Difference Between Saving and Investing

Why its Important to Know the Difference Between Saving and Investing

Sometimes people use the words investing and saving interchangeably, but they are quite different.  It’s important to know the difference so you can get the most out of the money that you’ve worked hard to earn.

When it comes to saving for their future, apart from contributing to a workplace pension, most people wouldn’t go further than putting their money into the highest interest savings account they can find.  The idea of investing money instead is viewed by many as risky, confusing, or just for the wealthy and bankers. 

Because of this many people in this country stick to the tried and tested “safe” option of keeping all their money in savings accounts.  However, by trying to be cautious, many of these people are actually losing money.  With cash stuck in savings accounts paying below the rate of inflation, the spending power of this money becomes eroded and the money is effectively worth less over time.

Yet it’s not a choice between saving or investing, both are important and it’s likely a mixture of both will be the best solution.  Saving can also be seen as the first step towards investing.

Understanding what investing is and how it is different from saving will allow you to better decide if investing is for you.

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What is saving and investing?

Saving is putting money aside somewhere safe until you need it, and is something almost all us have done at some point in our lives. 

The money is usually put in your bank’s Current or Savings account or in another safe place such as NS&I, and can usually be accessed at short notice when needed.  Money in a bank account is easy to keep track of, the amount doesn’t fluctuate, you know roughly what interest you are earning (even if not very much!) and it is looked after by the bank.

Saving is also something we are all familiar with and we are encouraged to do from an early age.  It can be viewed as safe, dependable and familiar.

But what about investing?  Investing is putting your money into something with the expectation that its value will grow over time, providing you with the opportunity to create more wealth.  Saving can be seen as a step on the way to investing, after all you usually need to save some money before you can invest it!

With investing you put your money into assets, often shares, funds (groups of shares) or bonds, and make a gain (the equivalent of interest on your savings) when the share price goes up or when the share pays out some money (a dividend).  The main difference between investing and saving is the level of risk – with savings you can be confident that your money is safe and protected, with investing it is less straightforward.  So why does anyone invest?  The simple answer is that the income that can be generated is a lot higher and if you invest in the correct way the risks can be minimised to an acceptable level.  Many of us invest without knowing, e.g. with your private and most workplace pensions being invested in the stock market.

The risk with savings that is often overlooked is the risk that your money will be worth less when you withdraw it – if the interest rate is paying less than inflation then your money will be worth less.

How is investing different from saving?

There are a few key differences between saving and investing.  Understanding these will help you decide which is right for you in what situation.

  • Higher Returns – historically investing in shares and other similar assets has yielded a much higher return than savings, and these higher returns are one of the main reasons that people choose investment over savings.  However, these potential higher returns come with some significant consequences that need to be considered.
  • Different Risks – there are risks with both investing and saving and understanding the difference is crucial to work out where the best place for your money is.  With investing, the main risk is that you will get back less than you put in; you are relying on the performance of whatever you invest in, and it may not perform as well as expected.  Whilst a good Investment Adviser will help you to manage and reduce risks as much as possible they cannot be completely removed.  Saving by contrast is seen as virtually risk free, you know the return (interest rate) you will receive and you will at least get back the same money that you put in.  However, the often overlooked risk with saving is that the value of your money is shrinking; if your savings rate is below inflation then your savings are losing value.  You may be safe in terms of not losing it all, but in return you are running the risk of losing a part of it every year to inflation.
  • What you can do with your money – when it comes to savings there may be a range of banks offering savings accounts, but apart from a slight difference in interest rate they are all pretty much the same.  Investing however gives you the potential to invest in a large number of companies, countries, sectors (such as property) etc.  This gives you more control and flexibility on where your hard earn money goes.
  • Be ethical with your money – Similar to the last point, investing allows you to choose where your money goes.  Rather than giving it to a bank, you can choose to invest part or all of your money into a series of green and ethical investments, getting the added bonus of using your money to contribute to what you believe in whilst earning a return.
  • Accessing your money – investing should be seen as more of a long term endeavour, and usually a timescale of at least 5 years or preferably more is recommended.  This is because it can be slow and expensive to withdraw cash from investments at short notice.  Time is needed to exit in a safe manner that won’t reduce your funds too much.  Savings is a lot more straightforward, as apart from Notice or Fixed accounts (where there is a limit of withdrawals) your cash is available pretty much instantly.

So what's better, Saving or Investing?

The answer is, it depends!

As we have seen savings and investing can both be great ways to make your money grow.  Which one you choose depends on your situation and questions such as:

  • How much do you have to save or invest?
  • How long before you need the money?
  • What’s your attitude to risk?
  • What’s your experience and view on investing?

Saving is great for a short term goal, a rainy day fund or when you need to put money aside for a short while without worrying about it.  If you already have a rainy day fund and have excess savings and a longer-term objective (such as saving for your retirement) then it’s likely that investing would be more suitable.

An Independent Financial Adviser will be able to talk you through the difference in more detail and help you explore more about investing; whether it is the right fit for you and how you can get started.  Please get in touch for a chat if you would like to discuss this further.

Final thoughts

As we can see there are many differences between savings and investing.  In short they are both ways of putting money aside for the future and helping that money to grow.  Which one is right for you (and it is likely that a combination of both) depends on your situation, as everyone is different. 

And it is not only a simple choice of save or invest.  Within the world of investing there is a huge range of types of investment, with some much closer to saving in terms of risks and rewards.

We have a further article on whether to save or invest, but if you would like to know more then please drop us an email or give us a call and we will be happy to work out which could be the right choice for you.