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Should I save or invest my money?

Wondering whether you should save or invest your money? Here’s a short guide to help you make the right decision.
Should I save or invest my money?
Reading time: 7 mins

There’s no denying it, saving and investing are both important as they can help shape your financial future. However, they’re two very different ways to build a nest egg for the future, and the pros and cons are well worth knowing if you want to give your money the best chance to grow.


What’s the difference between saving and investing?
Saving is the simple act of putting money aside for the things you want in the future, whether it’s a holiday or a home. Typically, when you put your money in a savings account with a bank or building society, they use your money to lend to other customers and in return, not only are you guaranteed to get back what you saved, you get also a little bit of interest.

With investing, there’s no such guarantee. When you invest, you typically buy things, like shares and bonds at a certain price in the hope the price will go up over time. Just like when you buy a house.  If it does, then you make a profit (or a positive return) when you sell. But, if it decreases instead, you would get back less than you put in when you sell your investments.

It’s often assumed that you need to be a financial wizard to start investing. Well, this isn’t completely true. With robo-investing platforms, like ours, you don’t need any experience to join the world of investing as investment experts will do the hard work for you, from buying your investments to managing your Plan. All you need to do is choose how much to invest and the risk level that suits you. What’s more, robo-investing lets you invest as little as you like and can offer a large range of investment products, including Stocks and Shares ISAs as well as Ethical Investment Plans.


Why should I save?
There are two main reasons to save: for the future and to have an emergency fund. If your washing machine stops working and needs to be replaced, you’ll surely be reassured to know that there’s a pot of cash you can use to cover this unplanned expense. And yet, there are too few people tucking money away in the UK. A recent study even revealed that one in four adults has no savings1. Living without savings is likely to harm your financial future. So, start saving whatever you can afford and make sure you do it regularly. For instance, by setting up a monthly Direct Debit to your savings account, you’d be building wealth and a nest egg without even noticing it.

1: https://www.independent.co.uk/news/uk/home-news/british-adults-savings-none-quarter-debt-cost-living-emergencies-survey-results-a8265111.html


When should I consider investing?
If you’re preparing for retirement or want to plan ahead for your children, investing could be more suitable than keeping your money in a savings account. Although you’re guaranteed to get back what you put in with saving, inflation could erode the real value of your money. Indeed, if the interest rate you get is below the rate of inflation, the value of your savings will fall. What does it mean for you? Well, let’s say you have money saved in an account paying 1% interest and inflation is running at 2%. After 12 months, your money will grow by 1%, but if you were to withdraw it, you’d quickly find out that you’ve lost some purchase power because prices for products have increased faster than your savings. If you’re pursuing long-term financial growth and want inflation-beating returns, then it might be worth turning to other options, like investing.


Why should I consider investing?
With investing, your returns aren’t tied to any interest rates and they instead depend on how much your investments are worth when you sell them. This means two things. There’s a risk you could get back less than you initially invested, but this also means you could end up with higher returns over the long-term. In fact, in the long run, investing tends to do better than cash. A Barclays Equity Gilt Study found that a stock kept for any ten-year period since 1899, has had a 91% chance of outperforming cash2.

Despite this likelihood, many people still see investing as being too risky. Saying there isn’t any risk with investing would be a lie, but investment risk is something which is deeply misunderstood. When you hold a general investment account or a Stocks and Shares ISA, the value of your investments will fluctuate – not only is this normal, it’s also something you can manage by focusing on the long-term. Remaining invested for a number of years can help you ride out market bumps and gives your money more time to flourish. Evidence suggests that people who remained invested in the FTSE 100 index for 10 years at any stage since 1984 had an 87% chance of ending up with a positive return3.

2: https://moneyweek.com/505257/stocks-beat-cash-and-bonds-over-the-long-term/

3: Bloomberg


Quiz: Am I ready to invest?

  1. What kind of saver are you?
    A .I can’t call myself a saver as I have no savings
    B. I’m a bad saver, I only put money aside when I think about it
    C. I’m a good saver, I’ve set up a regular Direct Debit to my savings account


  1. Your washing machine breaks and you’ve got to replace it; what’s your reaction?
    A. I’ve got to borrow money from family or friends
    B. I need to use all my savings, which means I have none now
    C. I have enough money in my rainy day fund to cover this expense


  1. What’s your main financial goal this year?
    A. Pay back my loans
    B. Put money aside for a new car
    C. Start saving for my children’s future


  1. How do you plan your finances?
    A. I don’t really plan – I just live from day to day
    B. I’ve created a budget, but I don’t always stick to it
    C. I plan everything ahead and I make sure I have money aside


  1. How would you describe your spending habits?
    A. I’m a bit of a shopping addict and spend a lot on clothes and shoes
    B. I try not to spend too much but I don’t always manage to resist impulse buying
    C. I only spend what’s left after saving and I make sure it’s spent on necessities


Mostly As: You seem to be struggling with your finances, and investing might not be what you should focus on. The first thing you want to do is try and get your finances in shape. Start by reviewing your expenses and create a budget, so you can reduce your spending. Also, make sure you save – remember it doesn’t have to be big lump sums, putting small sums aside regularly can help you build a healthy financial future.

Mostly Bs: You’re on the right path, but you’re not entirely ready to take the plunge into investing. You understand how important saving is and you’re trying your best to put money aside. However, there are still many bad habits you’ve got to wave goodbye to. Make sure you keep up with your efforts and find ways to maximise your savings.

Mostly Cs: You seem to be in a good place with your finances and if you’re happy taking some risk, paying into a Stocks & Shares ISA could be something to consider. But before you make any decision, ask yourself the right questions: What are your investment goals? How long are you willing to hold onto your investments? How much can you afford to invest? How much risk will you be comfortable with? Will you be able to do it yourself or will you need help?


The tax treatment depends on your individual circumstances and may be subject to change in the future.


Please remember the value of your investments can go down as well as up, and you could get back less than invested.


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