Save or invest?
Last reviewed on 10 June 2016
Saving or investing for the future can help you achieve your financial goals. Deciding on the best approach will depend on a host of factors including your attitude to risk and how long you want to save for.
Saving and investment – which is best?
Saving is usually best for short-term goals which you want to achieve in five years or less. This can include saving for special items or occasions such as a holiday, wedding or car. It's also useful to have savings which you can get at quickly in the event of an emergency or if you need access to your money at a set time.
Investing is only really suitable if you plan to save for the medium-term (five to 10 years) or long-term (10 years plus) and are prepared to take some risk with your money in the pursuit of potentially higher rewards.
This is when you set aside money, usually in a savings account, and your money earns interest. There is no risk to your capital (the amount you put in) unless your savings provider goes bust, and even then you are likely to have some protection.
There is a whole range of savings accounts available.
While saving can be a relatively low-risk option, if you are saving for the long-term there is always the risk that inflation will reduce the real value of your money. For example, if you earn 3% interest after tax on your savings each year but inflation is 2%, the real value of your money is falling.
Investing and investment risk
Over time, inflation can have a big impact on the buying power of your savings. To achieve potentially higher returns you might want to consider investing. Many investments involve investing in the stock market and so are higher-risk. But potentially the stock market can produce better returns over the medium to longer term than savings accounts.
There are various types of investments, but all involve risk. The main risk is that you may not get back all the money you originally invested. But traditionally, the more risk you are prepared to take, the greater the potential rewards. This is known as the risk/return payoff.
Many investments involve investing in shares. As stock markets can go down as well as up, you should be prepared to invest for at least five years and often considerably longer to see a return on your money. Investing is not for the faint-hearted as there are usually no guarantees your money will grow and you could get back less than you invested.
Investing in individual shares is a high-risk strategy but you can reduce this risk by investing in a basket of shares so that if one share does badly hopefully others will do well. The simplest and cheapest way to do this is through products known as 'collective investments' or 'pooled investments'. Unit trusts, OEICs, investment trusts and life and pension funds are all types of collective investments.
What to consider
Most experts recommend building up enough savings to at least cover any emergencies you might have before you consider investing.
When choosing between saving or investing there are several factors to consider:
- How long you plan to save for. You should only consider stock market investment if you plan to keep your investment for at least five years. And even then, as markets can dip for long periods, you might well want to switch your money from stock market investments into a savings account a few years before you need access to your money.
- Your attitude to risk. The amount of risk you are prepared to take will depend on factors such as your age, other savings and your personality.
- How much you can afford. If you can only afford to save a small amount you may not want to risk investing this in share-based investments.