Saving vs investing

What’s the difference between saving and investing?

Both saving and investing are ways you can set money aside for the future. Generally speaking, saving is more appropriate if you are likely to need access to your money in the next five years and investing may be more suitable if you can leave your money invested for at least five years. But there's more to it than that.
 
Saving involves minimal risk of losing money, but it's potentially at the expense of lower returns compared with investing. However, while investing may offer higher returns than saving, it involves risk. The value of your investments can go down as well as up, and you may get back less than you paid in.

Saving explained

• You can save into bank or building society savings accounts. There are many different types of savings accounts available, including cash ISAs.
• Savings accounts typically offer interest on your money, and you may benefit from compound interest — earning interest on both your original savings and the interest already earned.
• Savings accounts can be a good option for short-term goals, such as saving for a holiday, a wedding or home improvements.
• You can usually access your savings easily, and their value won’t drop unless you withdraw money. This makes them a good option for building an emergency fund of three to six months’ worth of spending, as recommended by the independent, government-backed MoneyHelper service (opens in a new window).
• If the rate that prices are rising by (inflation) is higher than the rate of interest you’re getting on your savings, the real value of your money will fall over time, meaning it won’t buy as much in the future.

Investing explained

• Investing is generally better for medium- to long-term goals, such as saving for retirement or to cover university fees for your child, as there’s a greater chance you’ll see returns above inflation over longer time periods.
• Any gains you may make on your investments are known as your ‘return’. Returns might come from rising share prices, dividends (a share of a company’s profits), rental income from commercial property or other sources.
• With investing, you may also get potential gains from compound growth. This involves reinvesting any returns your investments make so you have the opportunity for growth, not just on your original investment but also on those reinvested returns.
• You can invest in a wide variety of different things, such as stocks and shares (equities), bonds and property.
• Over the long term, investment returns have the potential to be higher than the interest on savings accounts. However returns aren't guaranteed and you could get back less than you paid in.
• ISA providers typically charge a fee when you invest to cover the costs of managing your investments. This fee can vary from one ISA provider to another.
• You should generally be prepared to keep your money invested for at least five years. That can give it enough time to ride out market ups and downs.

The benefits of saving

• Typically, you won’t pay any fees or charges.
• It's a low risk way to get a return on your money.
• Interest payments are generally more stable and predictable than investment returns. 

The benefits of investing

• Over the long term, investment returns have the potential to be higher than interest on savings accounts and cash ISAs. 
• If your investment growth beats inflation, your money retains its buying power. 

Does saving have any risks?

• If inflation is higher than the interest rate on your savings, the real value of your money will fall over time.
• If the Bank of England cuts interest rates, your savings interest rate is likely to fall too unless your savings are in a fixed rate account, where the interest will not change until the end of the term.
• The highest interest rates tend to be on fixed-term accounts where you have to lock your money away for an agreed period of time.

Does investing have any risks?

• While some investments aren’t as risky as others, all investments can go down as well as up in value and you may get back less than you paid in.
• If you need to take money out of investments during a market downturn, it may be worth less than you invested at that point.