What's the difference between saving and investing?

Understanding the difference between saving and investing

Saving and investing are two of the most common money management terms you’ll hear, but what do they actually mean? 

 

Savings and investments may seem alike, but they have different purposes. And each comes with its own advantages and drawbacks. Understanding the difference is important; so, you can make informed financial choices for your future. 

 

What is saving? 

Starting to save is the practice of putting money aside for short term goals or needs. Usually, this money is kept in a savings account, like our regular saver accounts. 

 

You can choose a savings account which gives you access to your money. And this makes saving a good option if you want to be able to withdraw money for things like emergency funds, treats, or unplanned expenses, while also building funds for your future. 

 

What could you be saving for?  

You may want to save for a few practical and aspirational reasons: 

 

• Building an emergency fund – Having savings set aside for unexpected expenses, like car repairs or home maintenance. Some people find this provides peace of mind. 
• Planning for holidays – Saving allows you to enjoy a well-earned break without relying on credit. So you return home refreshed, instead of facing repayments. 
• Major purchases – Lots of people save for a big ticket item; like a car, a wedding, or a house deposit. Having savings can reduce the need to borrow money and pay interest. 

 

What should you consider before saving?  

While saving money is generally a good habit, there are a few things to consider to be sure it’s the best fit for your personal needs: 

 

•  Interest rates – Savings accounts typically offer interest. But interest rates vary and can be impacted by external factors. This means your money may not grow significantly over time. 
•  Inflation – Inflation reduces the purchasing power of money. It’s often the reason we see the prices rising on everyday expenses, like the weekly shop or your mobile phone contract. If inflation is higher than your savings account interest rate, the ‘real life’ value of your money could decline, even if your interest is being compounded. 
• Accessibility – Many savings accounts allow you to withdraw your money quickly, which is great for emergencies.But this usually means a lower interest rate, which might not be ideal for long-term wealth growth. 

 

What is investing? 

Starting to invest is a strategy for growing your money over the long term by purchasing assets like stocks, funds, bonds, or property. 

 

Investing involves risk because the value of your investments can fluctuate. However, with the right strategy, investing has the potential to provide higher returns than a standard savings account, but the possibility of loss is very real. 

 

What are the benefits of investing?  

Investing offers several advantages over saving, which might make it a more attractive strategy for your personal situation and goals: 

• Potential for higher returns – Historically, investing in stocks and funds has provided better returns compared to savings accounts. 
• Compounding growth – Investments can benefit from compound growth, where your earnings generate further earnings over time. The longer you invest, the greater the potential impact. 
• Long-term wealth building – Investing is particularly useful for long-term goals, like  saving for your retirement, or building funds to support your family’s future needs. 
• Pension contributions – If you're employed, you may be eligible for pension contributions from your employer, which are tax-free at the point of investment. Speak with your employer about the pension schemes they offer.

 

Risks of investing 

While investing can be rewarding, it does come involving genuine risks that you must be prepared for: 

• Market volatility – The value of investments can rise and fall due to economic conditions, company performance, or global events. 
• No guaranteed returns – Unlike savings accounts protected up to FSCS limits, investments can lose some or all of their value. Protection varies depending on the type of investment, visit www.fscs.org.uk for more information. 
• Diversification matters – Spreading investments across different assets can help reduce risk. Putting all your money into one stock or fund can be risky if that investment performs poorly. 

 

Should you save or invest? 

Deciding between saving money vs investing ultimately depends on your financial goals, timeframe, and the level of risk you’re comfortable with: 

• Saving can be better for short-term goals – If you need money for a short-term goal like a holiday, wedding, or emergency fund, saving could be a better option for you. 
• Investing can support long-term goals – If you’re planning for retirement or aiming to grow wealth over decades, investing can offer the potential for greater returns. 
• You can do both – Many people benefit from having both savings and investments. A solid emergency fund can give you financial security, while investments could help money grow over time. 

 

Making your decision; saving or investing 

Both saving and investing can play useful roles in your financial planning. While saving involves less risk and gives you the option to access your money, investing can help your funds grow for the future. By understanding the benefits and risks of each, you can make informed decisions that align with your goals. 

 

The choice between investing vs saving is very personal. What you choose will depend on your circumstances and goals. Often, a balanced approach, with both savings for security and investments for growth, can be a smart strategy.  

 

If you're unsure which route to take or need expert guidance, it can be helpful to consult an Independent Financial Advisor (IFA). They can help you navigate your options and create a strategy that works best for your specific needs and financial situation.