If you have money left at the end of the month, you may be wondering whether you should save or
invest it. In a perfect world, you'll have both savings and investments because each have a
different yet equally important role to play when it comes to helping you improve your finances.
Your savings are there so you have money you can access in case something unexpected happens,
like the boiler breaking down, and also for short-term financial goals, those in the next
few years such as holidays, house deposit, or a wedding. Investments on the other hand help with
your long-term financial security because stock markets tend to produce better returns than cash
over time, so investing provides the potential to increase your wealth by more than if you just
leave it all in savings. There is additional risk involved though because stock markets fluctuate,
which is why it's important not to invest all your money and have some savings as
well. If you're only investing for a year or two and the stock market falls,
you've got less time for it to recover, so there's a high chance you could lose money. However,
this is less likely to happen the longer you keep your money invested.
So how much money do you need in savings before you're ready to invest? Some suggest three months’
salary, others advise more, and there's no right or wrong here because it all depends on you and
your circumstances. To work out the right amount for you, consider things such as how much you need
to cover essential bills each month in case you're unable to work for any reason. Also,
if you were to lose your job, how long do you think it would take to find a new one? And is
yours the only salary coming into the household or is there another one to fall back on? For one
person, three months’ salary might be enough; but for somebody else they might feel they need more.
But one of the big problems here in the UK is that even when people do have savings,
many don't go on to invest and this is putting their future financial
security at risk because they face not having enough money to last them through retirement.
There's lots of research about why this is and two of the main barriers that have been identified
that people are scared of investing because of the risk and because they think it's too complicated.
Yes, there are risks, but there are also great potential rewards.
And there are steps you can take to reduce the risk and reduce the chance of losing money. Now,
I've already talked about the importance of time here. But another key thing is diversification.
You can spread the risk by holding a broad range of investments. After all no single
investment will be the top performer all of the time and in all economic conditions.
So by holding a good spread the hope is that if one part of your portfolio isn't doing so well,
you'll have other investments that are faring better offsetting any losses.
Many people also worry that investing is complicated and not suitable for them. But
once they look into it in more detail and get started, they often realise it's not
as complex as it can first appear and there are plenty of resources to help. At Barclays,
we produce lots of content: articles, videos, and podcasts that are all free and available
to anyone. We also have a research centre to help customers with their investment decisions.
Complexity and risks aren't the only things that can put people off investing though.
The fact we talk about it being something to help you in the future rather than the near
term also means that other things can feel more important, which is totally understandable.
But the sooner you start, the more likely you are to achieve your longer-term goals
and the easier it will be because you won't have to invest as much each month. Finally,
whether you're at the stage of building up your savings or are in a position to invest too,
putting away money monthly is a great habit to get into and it will help you reach your goals sooner.