There’s no denying that saving and investing are both important for shaping your financial future.
But although they are both ways to boost your wealth, they’re actually pretty different – meaning the pros and cons are worth knowing. And which method you choose to grow your money will depend on a variety of factors.
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 that's a holiday, a new car, or even something as big as moving or buying your first home.
Typically, when you put your money in a savings account with a bank or building society, they'll use your money to lend to other customers. In return, not only are you guaranteed to get back what you saved, but you get also a little bit of interest on top of that.
With investing, there’s no such guarantee that you'll get back what you put in. When you invest, you typically buy assets (like shares and bonds) at a certain price in the hope that it will go up over time. Just like when you buy a house.
If it does, then you'll 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. However, although returns aren't guaranteed, investing could give your money more potential to grow over the long-term because your returns won't be tied to fixed interest rates like savings are.
But the key thing here is 'long-term' as investing is typically considered is to be something you do for a longer timeframe as this will give you an opportunity to ride out market ups and downs.
It’s often assumed that you have to be a financial expert to invest, but that's not true. Many platforms (like Wealthify) will do all the investing for you, and offer a range of investment products to suit your needs, like Stocks and Shares ISAs and Ethical Investment Plans. But more on that later.
Why should I save?
There are a number of reasons to save, such as for specific purchases and to have an emergency fund.
If you lose your job and don't know when your next paycheck will come in, or 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 putting money away.
In fact, in 2023, almost a quarter of adults in the UK have nothing saved for a rainy day.1
Living without any savings is likely to stress you out and harm your financial future by preventing you from reaching your goals. So, consider putting some money away if you can.
When should I consider investing?
If you’re preparing for things in the future, like your retirement, or you have young children and you want to build a nest egg for them to use when they're older, then investing could be a more suitable option to consider than keeping your money in a savings account.
Although you’re guaranteed to get back what you put in with saving, inflation could actually erode the value of your money over time. Unless the interest rate you're getting is less than the rate of inflation, it will be worth less in a year's time.
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 to get potentially inflation-beating returns on your money, 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. The first is that there is a risk that you might get back less than you initially invested. The second is that you could end up with higher returns in the long-run depending on how markets perform.
Despite this, many people still see investing as being too risky. And although saying there isn’t any risk with investing would be a lie, investment risk is something that can be easily misunderstood.
When you hold a a Stocks and Shares ISA (where you can invest up to £20,000 a year without paying tax on your returns) or a General Investment Account (for investing outside of your ISA allowance), the value of your investments will fluctuate. And this is completely normal.
Remaining invested for a number of years might help you ride out market bumps, giving your money more time to flourish. In fact, evidence suggests that people who remained invested in the FTSE 100 index for 10 years between 1984 and 2021 had an 87% chance of getting a positive return.2
Am I ready to invest?
If you're considering investing but are unsure if now is the right time, take the quiz below to help you get a better idea of whether you're ready.
Simply go through each question, making a note of if you answered A, B or C for each. Then add up your responses at the end to see which one came up top and what that could mean for you.
- 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 and regularly put money away
- Your washing machine breaks and you have to replace it. What do you do?
A. Borrow money from family or friends
B. Use all my savings, leaving me with none left
C. Use money from rainy day fund as I have enough in there to cover the expense
- What’s your main financial goal this year?
A. To pay back my loans and debts
B. Put money aside for something specific, like a new car
C. Start saving for my children’s future
- How do you plan your finances?
A. I don’t really plan – I just live each day as it comes
B. I’ve created a budget, but don’t always stick to it
C. I'm always ahead and make sure I have money aside
- How would you describe your spending habits?
A. I’m a bit of a shopping addict and spend more than I should
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 often on necessities
Which number did you choose the most?
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 a 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.
- Data from Bloomberg