You may have wondered, "Should I save or invest?".
Here, we look at both options to help you decide – or if you need both.
Saving is setting aside some of your money for future use, rather than spending it. You can add to your savings in one-off or regular payments. And if you use an easy-access savings account, you can get back what you put in – plus the interest you've earned – whenever you want it.
However, saving has a lower risk of losing value. Under the Financial Services Compensation Scheme (FSCS), if a UK bank or building society you save with goes bust, you'd get back up to £85,000 of your savings.
Is saving risk-free? Not exactly. Interest rates can go up and down. When interest rates are low, the return you'll get on your money will be very modest. The risk is it won't beat inflation – the rate at which the prices of goods and services increase. So, while the money in your savings account isn't going anywhere, its purchasing power drops over time. In other words, it will buy you less.
Investing is another way of setting aside money for the future, where you invest your money into something with the aim of making a profit in the long run.
There are different ways to invest, which typically involve charges or fees. Perhaps the most well-known are:
When you invest, you're exposed to a different type of risk – exposure to the markets. The value of your investment can, and will, jump around so you can get back less than you put in. Your expected returns can also fluctuate and are not guaranteed. If you’re thinking of investing, you should too.
Ideally, aim to invest for 5 years or more. A longer time frame gives your investment more time to recover if it falls in value. By planning when to access your money, you can manage the risk you take.
Why take any risk? Well, for a start, not all investment risk is equal. And the benefit of taking a calculated amount of risk is – it gives you the potential to make more money than you would from a savings account.
Is investing worth the risk? Our guide can help you to decide.
If you have more than one goal you’d like to put your money towards, you might consider a combination of saving (for short-term goals) and investing (for long-term goals).
Work out how much you can afford to put away each month. Creating a budget can help you do this.
When you have a figure in mind, think about what you might need the money for and when.
It's helpful to split your money among several pots:
Before you save for anything else, you should build up an emergency fund of at least 3 months’ worth of living expenses to fall back on. Ideally, this should be in an easily accessible savings account.
If you need money in the short-term, such as a home deposit, saving makes sense. Investing for less than 5 years will give your investment less chance to make up for any fall in value.
For medium-term money, maybe to pay for a wedding – saving could make sense. Although, if you're prepared to take some risk – investing in funds could earn you a greater return on your money.
For money you may not need straight away, such as a retirement fund – taking a degree of investment risk could earn you a greater return, as the value of your savings will get eroded by inflation over time.
Save for what's around the corner and invest for the future.