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 the 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 their money gets eroded and the money is effectively worse 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 savings will allow you to better decide if investing is for you.
Saving is putting money aside somewhere safe until you need it, and is something almost all us us have done at some point in our lives.
The money is usually put in your banks 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 is looked after by the bank and also covered by the Financial Services Compensation Scheme (currently up to £85,000).
Saving is also something we are all familiar with and is something 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 specific 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 some save some money before you can invest it!
With investing you put your money into an assets, often shares, funds (groups of shares) or bonds, and make a gain (equivalent of interest on your savings) when the share price goes up or when the share pays our out some money (a dividend). The main difference between investing and saving is the level of risk – with savings you can be confident that you 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, with our private and most workplace pensions being invested in the stockmarket.
The risk with savings that is often overlooked is the risk that your money will be worse les when you get it out – if the interest rate is paying less than inflation then your money is worth less.
There are a few key differences between saving and investing. Understanding these will help you decide which is right for you in what situation.
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:
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 could 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 and if it is a right fit for you and how you would get started. Please get in touch for a chat to discuss further.
Saving means putting money aside that you don’t need right now for an emergency or for a future purchase. It’s money you’d like to have access to quickly, with little or no risk. Financial organisations such as Banks provide a variety of savings opportunities.
Investing is the process of purchasing assets such as stocks, bonds, funds, or property with the aim of earning an income from the asset. The majority of investments are made with the intention of achieving long-term objectives. In general, investments can be classified as either income or growth investments.
Here are the key differences between the savings and investing.
The level of risk taken is the most significant distinction between saving and investing. You will normally receive a lower return by saving, but you will be virtually risk-free. Investing, on the other hand, allows you to earn a bigger return while also exposing you to the danger of losing money. A savings account is generally the best option if you’re seeking to save a modest amount for a short-term objective. Alternatively, if you’re trying to save for a large, long-term goal like retirement, then it’s likely that investments (which can be within a pension) would be more in line with your needs.
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