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Is it better to save or invest?

You might wonder if you’re better off saving or investing your money – especially in today’s rising interest rate environment. Helen McGinty – Head of Financial Advice Distribution at Skipton Building Society, explains the differences between saving and investing.

Should you save or should you invest?

It’s an important question to ask yourself when it comes to your money matters and goals. 

But the truth is, both saving and investing can play an important role in your financial plans. There isn’t one that’s better than the other, it’s more that they are suited to different goals.

What’s the difference between savings and investments?

Saving centres around short-term goals you’d like to reach in the next five years. It might be a rainy-day fund, or to pay for something specific in the near future – such as a holiday, wedding or home renovations.

Investing is about goals that are more than five years away – like retirement or putting money away for children or grandchildren.

Why should I save?

  • For a rainy-day pot – if the boiler breaks or you have a change in circumstances
  • You’re working towards short-term goals –  like a wedding
  • You want access to your money straight away

Why should I invest?

  • For long-term goals, like retirement
  • You want the chance to grow your money more than you could with cash
  • You’re happy to take a level of risk with your money and won’t need to access it for at least five years

How do I save and invest my money?

There’s no shortage of options when it comes to saving your money. You could put it into an easy access bank or building society account or a tax-friendly cash ISA (Individual Savings Account).

You’ll receive a level of interest on the money you save and you’ll have peace of mind that your money is being looked after. Interest rates have risen significantly since the end of 2021. So if you have money that’s been stored away in a savings account for some time, it could be worth checking it’s earning a competitive rate of interest.  

When you invest, you have what’s called an investment portfolio.

This involves spreading your money around different types of investments called asset classes. For example, you can invest in a mix of shares, property and bonds. Each asset class has the potential to increase in value over time, depending on how markets are performing.

What are the risks of saving and investing?

Nothing in life is perfect. And both saving and investing come with their own drawbacks. 

The biggest risk when it comes to saving is inflation, which is how quickly prices increase (also known as the cost of living). There’s a chance your cash savings might struggle to keep up with the pace of inflation.

To truly grow the value of your savings, they need to be earning interest above the rate of inflation. And that’s especially hard to do in the current climate, when inflation is particularly high.

With investing, the value of your investment can go down as well as up. This means you could get back less than you put in.

But that’s why it’s so important you’re prepared to invest for a longer period of time. That way you have more room for potential growth and recovery from any bumps in the road.

The nature of investing also means you need to invest in a way you’re comfortable with – for example, not taking too much risk with your money. It can feel a tad complicated trying to figure all this out, but that’s where a little expert help could make all the difference.

Do I need a financial adviser to help me manage my savings and investments?

The whole point of a financial adviser is to look at getting your money working harder and in a way that could help you to achieve your future goals.

An adviser can help you to:

  • Figure out what it is you’d like to achieve with your money.
  • Build a financial plan that’s right for you – including making sure you take a level of risk you’re comfortable with.   
  • Help you to put plans in place suited to your goals. For example, investing through a pension or a tax-efficient stocks and shares ISA.

So there we have it, a whistle stop tour of saving and investing – including why both could be great for making your money work harder.  

Your money is at risk with investing. The tax treatment of savings and investments depends on personal circumstances. Tax rules may change in the future.