With historically low interest rates in banks and inflation on the rise, the money in your savings account is slowly but surely losing value. Put another way, your money loses purchasing power. Do you have dreams of starting a business, funding a wedding or jetting across the world? If you can afford to lock away some money for ﬁve or more years, this is your queue to invest. So let’s run through the differences and help you figure out whether saving or investing is for you.
What is saving?
Saving money is putting a portion of your income to one side, and storing it in a bank account for purchases and emergencies. It’s money that you can withdraw at any moment, and generally isn’t expected to lose value (although in reality, inflation and interest rates are eating away at your savings). It is useful in the short-term – for purchases that need to be made within less than five years. So yes, it really is like planting seeds for the next summer.
What is investing?
Investing money, on the other hand, is all about building the wealth that Future You deserves. It’s when you pour money into a range of different assets, such as stocks and shares with the intention of making a higher return on the money than you initially put in. Investing is a game change for those long-term goals, such as saving for your children to go to college, saving for a house deposit, or simply saving for retirement. Reliant on market movements, they are subject to rises and falls in value. So yes, investing is like planting trees for years to come. Future You will thank you.
Why savings will lose value
The downside of saving is that your money slowly but surely depreciates in value. Yes, we have always been told that saving money is a good idea; a smart strategy to create greater stability for the future. After all, you just never know what fateful and financially inconvenient event is around the corner. You could fall ill for example, lose your job for a number of reasons, have your bike stolen, or car written off. In theory, there is nothing wrong with that, however, there are smarter ways to handle your money, and that’s when investing comes in handy.
The problem is, historically low interest rates in the bank mean that our money simply does not grow when placed in a bank account. Most of us expect that the money we have on our savings account today is worth the same in five years. Unfortunately, it’s just not that simple. Because what you will be able to buy for £100 today may cost you £120 in just a few years. This is due to inflation.
What is inflation?
You’ve probably come across the term inflation before, but have you thought about what inflation means personally to you and your money? In a nutshell, inflation is a state the economy in which the value of the currency decreases due to an increase in prices. Inflation in itself is not a problem, but it can cause losses in cash holdings. In other words, if the inflation rate is higher than the interest rate in your savings account, you're definitely losing money. Why would anyone prioritise losing money over growing their money? Well, there are some instances of course.
When should I save?
1. You’ve got a short-term goal
If you’re looking to fund a wedding next year, or have dreams of quitting your job and starting a business in the next few months, then saving is the way to go. Having access to a savings account which you can withdraw money from at any time will enable you to accomplish those goals effectively.
No one know what the future holds. That's why growing your money is crucial.
1. To build an emergency fund (aka. F*** You Fund)
Think of it as a risk exercise: no one knows what will happen in the future – whether their washing machine will break down tomorrow or whether their company folds and they’re made redundant. So having money that is stored away in the bank (something we refer to as a F*** You Fund) and can be accessed at any point, prepares people for the unexpected events and emergencies that crop up in our everyday lives. Why not start building you F*** You Fund today?
2. To save for more costly items
Money can also be saved to purchase the more luxury items that the monthly income can’t accommodate. Let’s say you want to buy a car in six months time – putting money into a savings account incrementally will enable you to save gradually.
When should I invest?
1. You have long-term goals
Do you have dreams of jetting around the world during retirement or starting that business idea? If you have goals that you want to achieve in five years or more, it’s worth storing money into investing.
2. When you’re comfortable with risk
Yes, savings are secure but they’re losing value. So if you’re comfortable adopting some risk for the potential of higher returns, then investing is for you. There are also strategies to mitigate risk, that can ensure you benefit from upwards trends in the market (such as diversification).
3. When you have an emergency fund
Cash savings still have their place in preparing you for unexpected emergencies, which is why we suggest having three to six months of your salary in an emergency fund. When you have that to fall back on, it’s time to invest.
Savings vs investing
In a nutshell, saving tends to be for the short term, while investing is for longer term. In the short term, it’s wise to build up those emergency cash savings you can easily withdraw if you need to (no one wants to be unprepared for unexpected surprises). Longer term, you might want to consider investing as a way of growing your money. There’s nothing more empowering knowing your money is working for you.
Get started investing
For this reason, among other things, investing could be seen as a no-brainer. Buying stocks will help your money hold its value, and maybe even make you more money. That said, of course, investing involves a risk in itself. When you choose to invest, you run the inevitable risk of losing money as well as making it. However, by placing that money into your savings account, you are sure to lose money, which we figured out before.
Therefore, try to consider the following; If there is a risk of losing money both by having the money in the account and investing the money, but there is only the risk of making money by investing them, why not invest your savings? You do not have the opportunity to make money in the bank, so is it not worth the risk of investing? We firmly believe that it is. Even low-risk profiles can be rewarding.
This is not to say that all your money needs to be invested in stocks. We recommend having a sum of money readily in the account for those unforeseen expenses, as they will occur. In addition, investing in the housing market as well as pensions is also a good idea. Overall, it is important to have a good level of control over your finances before investing, which is why educating yourself, learning the basics, and getting down with the lingo is key! Hence why we’ve built an entire universe that will help you start investing from start to finish.
Before you get started investing
Investing carries certain obvious advantages over the traditional savings method. Essentially, the important thing to consider is making a tangible plan for your investment. How much money would you like to invest? What exactly would you like to invest in? Be sure to create your risk profile to get off to the best possible start!
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