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What’s the difference between saving and investing?

Not sure whether you should put your spare cash in a savings account or invest it? Understand the differences between saving and investing before deciding.

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:

  • How saving and investing differ.
  • Why saving is less risky than investing.
  • Why you can potentially earn greater returns when you invest.

‘Saving’ is a very broad term, which many people interpret in different ways. For example, saving could refer to pension saving, or saving into a fund. Here, however, we mean saving in the context of putting money into a bank account, and how this compares to investing.

Saving into a deposit account is very different to investing, although they are both ways you can build your wealth.

Here’s an explanation of the key differences between the two.

Saving

Saving can help you reach your short term goals, as it doesn't involve tying your money up and you can usually access it whenever you want to. It can also provide peace of mind that your money won't suddenly fall in value just when you need it.

When you save into a bank account, usually provided by a bank or building society, any growth will come from the interest your savings account pays. Interest rates vary though, as does the access you have to your money.

When it comes to deciding what to do with your money, keeping it in cash is the lowest-risk option as you are guaranteed to get back what you put in. This is why it is important to build up a cash savings reserve before considering other options as it will give you security in case something unexpected happens.

Many cash savings accounts allow you to take money out whenever you want, but some don’t permit withdrawals for a certain period of time – these tend to be the accounts that pay the highest rates of interest so this is worth bearing in mind when comparing savings rates.

While savings accounts are low risk, they are not completely risk free. You could potentially lose money if the bank or building society you hold your money with goes bust. However, you can protect against this. As long as the institution is covered by the Financial Services Compensation Scheme, which Barclays is, the first £85,000 you hold with it is usually protected. For full details and conditions of the Scheme, see www.fscs.org.uk.

The other element of risk associated with saving is the chance that the interest you earn on your savings may not keep pace with inflation, or the rising cost of living. That means the purchasing power of your money could reduce over time.

This is one of the reasons many people look to invest some of their money in other asset classes as cash tends not to have the highest potential returns.

Investing

While saving refers to cash savings accounts, investing relates to other asset classes you may choose to put your money in such as stocks and shares, government and company bonds, commodities (gold, oil etc) and property.

The risks associated with these asset classes vary, but they are all higher-risk than cash as the value of your investment can fall as well as rise so you could lose money. Over the long-term however, they have tended to perform better than cash which is why investing is so popular. However, this is not guaranteed and past returns are not a reliable indicator of what will happen in the future.

Given the associated risks, investing in non-cash assets should only be considered if you are looking at a medium to long-term time horizon – usually at least five years. This hopefully gives you time to ride out any downturns and reduce the risk of you losing money.

What exactly you invest in depends on your approach to risk and your financial objectives.

Learn more about planning your goals

There, are ways of managing risk such as spreading your money across a range of investments and drip feeding your money into the market. But there’s no guarantee that you won’t lose money. Every time you invest, your money is at risk.

Learn more about diversifying your investments

Whether you decide to save or invest, don’t miss out on the tax benefits offered by an Individual Savings Account.

Learn more about Investment ISA allowances and deadlines

These tax rules are subject to change though. Their value to you will depend on your personal circumstances.

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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