In the world of personal finance, saving and investing are two strategies to help you achieve your financial goals. It can be easy to get them confused because they’re often used in place of each other when talking about money. While both involve setting money aside for the future, there are clear differences between them. Understanding these differences is essential for making informed decisions about your money.
1. When will I need access to my money?
For most people, saving means putting money into a bank or building society account for short-term goals such as a holiday, buying a car or building a fund for emergencies. Think of it as an easy-to-access pot of money that you can dip into as and when you need to. Typically, saving is for money you might need to access in the next five years.
On the other hand, investing is where you use your cash to buy another asset such as stocks, shares, or bonds. It’s ideal for long-term objectives like retirement planning, paying for higher education, or achieving substantial financial growth. Ideally, you wouldn’t need to access the money for around five to ten years.
2. What’s my appetite for risk?
Saving is generally considered low risk since funds are typically deposited in savings accounts, certificates of deposit (CDs), or other secure instruments. While the risk is minimal, the returns are also modest, often limited to the interest earned on the savings.
Investing, however, carries a higher level of risk as your capital is exposed to market fluctuations. Nevertheless, investing has the potential for higher returns, as various asset classes like stocks, bonds, and property can grow over time. The longer the investment timeframe, the greater potential for compounding returns. However, with investing, there’s no guarantee of making money and you could get back less than you invest.
3. The Impact of Inflation
While cash savings won’t fall in value, it’s important to think about the impact of inflation, especially during these current times of economic turmoil. Inflation is a rise in prices, which erodes the purchasing power of money over time. While savings accounts may offer interest, they may not keep pace with inflation, resulting in a decline in real value.
Investing can potentially provide a buffer against inflation since returns from certain investment vehicles have historically outpaced inflation rates. By allocating funds to investments, individuals can aim to grow their wealth in real terms.
4. Should you save or should you invest?
It’s not an either/ or scenario and for most people, it’s more a question of how much to save and how much to invest. Your financial adviser can help you work out your financial goals and set a timeframe against them, recommending solutions that best suit your own personal circumstances.
This article isn’t financial advice, so please speak to your adviser if you’re not sure what to do.
Investment value can go up or down and you could get back less than you invest.
