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.
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.
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 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.
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.