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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 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.

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So What is the difference between saving and investing?

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.

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.  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 understand the difference is crucial to work out where the best place for your money is.  With investing the big risk is that you will get back less than you invested; 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) your will receive up front and the money in your account is protected (currently up to £85,000) by the Financial Services Compensation Scheme.  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 loosing value.  They 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.
  • Be ethical with your money – Similar to the last point, investing allows you to chose where your money goes.  rather than giving it to a bank, you can choose to invest 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 and 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 wont 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 yo have to save/invest?
  • How long before you need the money?
  • What’s you 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 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.

Final thoughts

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 act of putting money aside for a future need or necessity is known as saving. When you decide to save money, you want the funds to be available as soon as possible, if not immediately. Investing, on the other hand, is best suited for longer-term goals.
  • Investing is similar to saving in that it involves putting money aside for the future, but it involves taking on more risk in exchange for a better return. Stocks, bonds, OEICs, unit trust, and exchange-traded funds (ETFs) are common investments.
  • If you want to invest money, it’s recommended you only do so with an intention to keep your money in the investment for at least five to seven years. Short-term investments can be quite volatile, and you can lose money on them. As a result, it’s critical that you only invest money that you won’t need right away.
  • A savings account is usually risk-free. Your initial capital is protected by the FSCS, and it is more easily accessible if and when you need it. This type of account allows you to put money aside for a specific reason, such as a summer holiday or a house deposit, in a shorter amount of time.
  • Investments are made with the goal of increasing long term wealth. They carry a higher level of risk, but they also have the potential to yield better profits than a traditional savings account. Investing is the process of investing your money to purchase an item with the goal of earning a rate of return over time, so increasing your wealth over time. Having a well-diversified portfolio makes sense as this helps spread your risk – as well as the potential to deliver returns – across a wide range of investment classes.

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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