Should I save in a bank account or invest?

It can be tempting to answer 'neither' when times are hard, but it's definitely worth putting money away for the future, whatever your plans might be.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • What risk issues dominate the savings vs investing conundrum.
  • How to judge the optimum time for moving savings into investments.
  • Why focussing on the long term is essential when investing.

Whether you save or invest depends on the state of your finances, whether you are prepared to take the risk of losing money and what you're trying to do with your money. Saving and investing both involve putting money aside and they're both based around goals, so what's the difference?

Saving vs. Investing

When you save money in 'cash', a bank or building society account say, you're putting it away for the proverbial rainy day. Either that or you're saving for something in particular like a new car, a holiday or your wedding. It's exactly the same as 'saving up' your money when you were a kid, the only difference is that you put it in a savings account instead of your piggy bank.

Investing, on the other hand, is all about trying to make your money grow over a longer period. You're not just putting it in an account and adding to it. When you invest, you're buying assets that you expect to increase in value over time, give you an income, or both. Of course, there's also the possibility of losing money. Risk is a big part of investment and there's no getting away from it. However, you can make sure the level of risk is appropriate for you.

First things first

Before you consider either saving or investing, it's important to think about whether you're ready. For example, if you've got outstanding debts, or you're not making ends meet, you'll need to attend to those things first. It's also a sensible move to have easy access to cash for everyday expenses as well as the unexpected ones that crop up from time to time. It's often suggested that having enough cash to cover about three months' worth of your outgoings is a good idea.

If you can do that comfortably and you've still got disposal income, you can think about putting away some money each month. You can put aside whatever you can live with comfortably, just don't overstretch.

Setting your goals

Whether you're saving or investing, you'll need to know your goals. Most people will have more than one, so it's helpful to divide them into short-term and long-term goals. In other words, what do you want from your money and when?

Saving in cash accounts tends to be better suited to short-term goals, generally those that are up to five years away. The stock market may go up or down in the short term and it's not easy to recover if you're only investing for a few years.

Longer-term goals that sit 10 years or more away are more suited to investing. That's partly because inflation can eat away at the value of your cash savings over the long term. The stock market has generally performed better than cash over the longer term and the longer your money is invested, the more chance you have of making better returns. That said, the past performance of investments is not a reliable indicator of their future performance. There are no guarantees in investing; you might get more but you might get less than saving in a bank account and you might even lose money, however long you hold your investments for.

Inflation can mean that the money you save or invest now may not be able to buy as much in the future as the cost of goods rises. If an item costs £100 today then, assuming a 2.25% rate of inflation, you'd need £156 to buy that same item in 20 years. So, if your savings are in a cash account with zero interest, the £100 will now only buy £64 worth of stuff.

In short, if you're putting money aside for a big holiday next year, investing won't be the right way to go. But if you're trying to ensure you have enough money for retirement, then that's more like a long-term investment goal provided you accept the risks.

Now plan your goals

Inevitably, some goals won't fit into the 'five years or sooner' or '10 years or longer' brackets; and the best course will most likely be a mix of both saving and investing. That's why it is important to plan your goals and figure out when you need to use the money you're putting aside.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

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