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Discover the differences between saving and investing to help you decide which option is right for you.
When planning for the future, saving and investing are two ways to set money aside, each with different purposes. Saving is usually better if you’ll need your money within five years, offering easy access and low risk - ideal for short-term goals or emergencies. Investing is typically better for the longer term, with potential for higher returns but also a risk that you may get back less than you paid in.
The right choice for you will depend on your goals, timing and how much risk you’re comfortable with – often, a mix of saving and investing is the best option.
What’s the difference between saving and investing?
| Saving | Investing | |
| What is it? | Saving means putting your money into a savings account where it can earn interest, and you'll usually get back at least what you put in. | Investing is putting your money into things like company shares (often called equities), bonds (loans to governments and companies) and property to help it grow in value over time. |
| What is it for? | Better for short-term goals, such as a holiday, wedding or home improvements. | Better for medium- to long-term goals, such as retirement savings or a child’s university fees. |
| How can I do it? | Through savings accounts, including cash ISAs, offered by banks and building societies. | Invest in things like company shares, bonds and property, often through funds and products like pensions and stocks and shares ISAs. |
| What are the benefits? | There's very little risk of losing money and your money will grow in value in line with interest rates. | Potential for higher growth than interest on cash savings, giving more opportunity for the value of your money to grow above the rate of inflation. |
| What are the risks? | If inflation is higher than the interest rate you get, the ‘real’ value of your money will fall over time, meaning your money will buy you less. | A drop in the value of your investments could mean losing money. The value of investments can go down as well as up, so you could get back less than you paid in. |
| Do I pay tax? | If you save through a cash ISA, you won’t pay any tax on the interest you earn. For other savings accounts, tax on interest depends on how much interest you earn and your personal tax circumstances. You won’t pay tax on any money you take out of savings accounts, including cash ISAs. |
If you invest through a stocks and shares ISA, you won’t pay any tax on investment returns. You also won’t pay any tax when you take money out. If you invest outside an ISA, you may pay tax on returns, depending on the amount and your personal tax circumstances. You may also have to pay tax when you take money out. |
Saving explained
You can put your money into savings accounts offered by banks or building societies. There’s a wide variety to choose from, including cash ISAs. Savings accounts are a handy way to set money aside for short-term goals, like a holiday, a wedding or home improvements.
These accounts usually pay you interest on your savings and thanks to something called compound interest – which means earning interest on both your original savings and the interest you’ve already earned – you could see your savings grow over time.
The benefits of saving
- You usually won’t pay any fees or charges.
- It’s a low-risk way to grow your money, giving you peace of mind for short-term goals.
- Interest payments are generally more stable and predictable than investment returns.
Investing explained
Investing tends to work best if you’re aiming for medium- to long-term goals, such as saving for retirement or covering children’s university costs. To give your money the best chance of keeping up with inflation, consider leaving your investments untouched for at least five years. This way, you’re more likely to weather any ups and downs in financial markets.
You can choose to invest in lots of different things (often called assets) such as company shares, bonds, and property. The returns you make might come from share prices going up, receiving dividends (a share of a company’s profits), earning rental income, or other sources. Just remember you’ll generally pay some sort of fee or charge to invest, although this will vary depending on who you invest with and how.
The benefits of investing
- Over the long term, investment returns have the potential to be higher than interest on savings accounts and cash ISAs. However, returns aren't guaranteed and you could get back less than you paid in.
- If your investment growth beats inflation, your money keeps its buying power, helping you achieve your long-term goals.
- With investing, you may also benefit from compound growth. Similar to compound interest, this is when any returns your investments make are reinvested so you have the opportunity for growth not just on your original investment but also on those reinvested returns.
Understanding the risks of saving and investing
Risks of saving
If the rate of inflation is higher than the interest rate paid on your savings, the real value of your money will fall over time, reducing its buying power.
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 rate won’t 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.
Risks of investing
While some investments aren’t as risky as others, all investments can go down as well as up in value, meaning you could get back less than you paid in.
You’ll generally pay some sort of management or transaction fee when you invest, which can eat into your overall returns.
If you need to take money out of investments during a market downturn, at that point in time, they may be worth less than you paid in.
The impact of inflation on cash savings
Saving money rather than investing it can seem like a more attractive option as it’s generally lower risk, and your money is typically secure in a bank or building society. But what you need to factor in, which a lot of people don’t, is the impact of inflation on cash savings. If inflation is higher than your savings interest rate, your money is actually losing value over time. So, it isn’t a completely risk-free option.
Here’s an example:
In January, you put £1,000 into a savings account, with an interest rate of 5% a year. At the end of the year, your £1,000 has grown to £1,050. But as inflation has been running at 8% throughout that year, your money has effectively lost 3% of its buying power in real terms. This means that the £1,050 will be able to buy you less now than the £1,000 did at the start of the year.
To grow your money, you may want to consider options where returns can beat inflation. Although past performance isn’t a guide to future performance - the value of all investments can go down as well as up and you could get back less than you paid in - history has shown that investments will generally provide above-inflation returns over the long term.
Should you save or invest?
Before choosing whether to save or invest, think about your goals. If they’re long term, such as your retirement, investing may be a better option as a longer-term timeframe gives you time to ride out market ups and downs.
For shorter-term goals or emergency savings, where you may want to or have to withdraw money within five years, easy-access cash savings accounts may be more suitable.
And, of course, you need to think about how comfortable you are with taking risks with your money. All investments involve some risk, so if you aren’t comfortable with that or can’t afford to lose any of the money you've invested, saving may be a better option for you.
Not sure what’s right for you? A financial adviser can help you decide.