Should you save or invest?

4 min read


While savings accounts may seem like a safe place to keep your hard-earned cash, low interest rates mean it's not always the best option

When deciding where to put our money, most of us accept the low returns offered on cash savings on the basis that at least our money is safe. But the dangers of inflation could mean you're taking a risk opting for cash.

Holding some of your savings in cash is a good idea. Money you're going to need in the short term – under five years – is far more accessible in a savings account and you don’t risk having to sell investments during a market dip.

However, using cash for long-term savings is a mistake. “Saving in a low interest rate world gives minimal nominal returns and may actually be giving negative real returns given that inflation is not zero,” says Nersen Pillay, Investment Director at Royal London Asset Management.

The irony is that saving may be more risky than investing in a global multi-asset fund if it doesn't protect the real value of your assets in the long run

Inflation-proof your money

Inflation is the rate at which the prices for goods and services is rising, and as a result the rate at which money loses value over time. Say the inflation rate is 2%. This means something that costs £100 now would cost £102 a year later. In order for your money to retain its purchasing power, it would need to be in an account paying at least 2% interest over that year. Unfortunately, these accounts are few and far between. 

Leave your savings in cash and, gradually, your money will shrink in real terms as it fails to grow as fast as inflation. But, most of us are still doing just that. If you want to see a real return on your money, you need to move up the risk ladder in order to improve your returns.

Don't put all your eggs in one basket

There is an old adage with money, the higher the risk the greater the return. But, investing in the stock market doesn’t have to mean gambling your cash on whether one miner will strike gold. Investing wisely and spreading your eggs across lots of baskets can allow you to beat the returns available on cash, without shouldering a huge level of risk.

“The key point about investing rather than just saving cash is that we can benefit from diversification,” says Nersen.

Historically, money invested in a wide range of asset classes – known as multi-asset investment – has beaten inflation and outperformed cash. Research by Royal London found that £1,000 placed in an average savings account a decade ago would be worth just £900 (in real terms) 10 years later. In contrast, £1,000 invested in a multi-asset fund would be worth £1,500, even after inflation.

“The irony is that saving may be more risky than investing in a global multi-asset fund if it doesn't protect the real value of your assets in the long run,” says Nersen. Royal London estimates that cash ISA holders have missed out on nearly £100bn in tax-free gains that they could have made over the past decade by investing in a multi-asset fund.

Seek advice if you need it

Before you invest in the stock market, it's a good idea to get some independent financial advice to decide on your attitude to risk, your financial goals, and look at your complete financial picture. This means you can pick an investment plan suited to your needs.

An independent financial adviser can help you build a balanced portfolio that keeps some of your money in the short-term safe haven of cash, but avoids the inflation trap that long-term cash saving risks.

Speak to a financial adviser

We recommend that you speak to a financial adviser before making any changes to your plan. 

There are a number of directories that you can use to search for one in your area and according to their specialisms.

Not ready for advice?

If you feel you're not ready for financial advice, there's support available where you can get good-quality guidance. Whatever you decide, making time to plan for the future is time well spent.

Visit the following websites for free and impartial guidance and support. 

  • MoneyHelper: access guides, tools and information to help improve your finances as well as your life savings.
  • Citizens Advice: provides useful information to help you manage your finances.
  • Pension Wise: a free and impartial retirement planning service, introduced by the government to help you understand your options.

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