Should I save or invest?

Everyone who wants to grow their money has grappled with the question. Saving versus investing – which is best?

There’s no one right answer, but there are a few things it can be helpful to consider. When deciding whether to save or invest, here are the questions you need to ask yourself.

What’s the difference between saving and investing?

Whether you save or invest, you’re putting money away for your future. To decide between saving vs investing, you need to think about risks, rewards, and when and for what purpose you plan to use your money.

Saving means putting your money in cash – often an easy-access account. It means you’ll have instant access to the money, and you know it won’t fall in value. If you put in £100, you won’t get less than £100 back. You’ll earn interest, too, meaning the interest can help your money to grow.

Investing means buying funds, shares or bonds on the investment markets. Over the longer term, investing usually (but not always) grows your money by more than if you’d left it in cash. But those higher potential rewards also mean higher potential risks. Your investments could fall in value and might take a long time to recover – so you’ll need to have patience, and take care not to invest money you think you might need in the short term.

Is it better to invest or save your money?

Usually the answer to this is: both. First, you’ll want to keep some money in cash that you can access in an emergency – if you had an unexpected bill or lost your job, for example. You don’t want that money exposed to investment markets, as it might drop at just the time you need to take it out.

Likewise, any money you know you’ll need in the short term should be saved in cash, rather than invested. That’s because generally you only want to invest money you know you won’t need access to in the next five years or more. It’ll give you time to hopefully ride out the ups and downs of investment markets.

Another reason to choose saving, versus investing, is if you don’t want to take a risk with any of your money. Risk appetites differ from person to person, but if you know that seeing your pot of money fall in value would have a big impact on your life, or your plans for the future, you might want to stick with cash and not take the risk of investing.

But if you want to achieve a potentially higher return from some of your money, and know you won’t need it for at least five years, then investing could be the right way to go.

What are the main differences between saving and investing?

• The first main difference of saving vs investing is that cash usually generates a lower return over the long term. If we look back at cash returns vs investing returns, investments have always outperformed cash over longer periods. So by investing you’ll probably generate more money for your future self.
• The second difference to consider when deciding whether to save or invest is inflation. Cash savings will rarely beat inflation, which means the spending power of your money gets eroded year after year. For example, if a chocolate bar costs £1 today and you have £100, you can buy 100 chocolate bars. But if inflation is 10%, in a year’s time that chocolate bar will cost £1.10. If you still have £100, you’ll only be able to buy 90 chocolate bars. Because investing offers higher returns, it gives your savings a better chance of beating inflation, even in times when inflation is higher.
• The third big difference between saving and investing is risk. Although inflation can eat into the value of savings over the long term, the cash itself is protected by the Financial Services Compensation Scheme (FSCS) if a UK bank or building society fails. The FSCS protects up to £85,000 per person, per banking license.

  Although investing has the best chance of beating inflation and growing your money over the long term, this is not guaranteed, and you could get back less than you originally invested. The FSCS can also step in (up to £85,000 per person) if an investment fund provider fails and is unable to meet claims against it. You’ll find further information about compensation arrangements at www.fscs.org.uk.

  Learn more about how to factor risk into yours

  When investing, of course, the value of your investments can fall as well as rise, so you could see the value of your money reduced. However, remember inflation. If cash interest rates are below the rate of inflation, the real-terms value of your will erode over time. With investing that risk is reduced. So it’s a balancing act.

• Finally, the fourth difference when weighing up saving vs investing is your time horizon. Saving is often a good option in the short term. But over the long term, the combination of low returns and inflation can eat into your savings’ value. By contrast, investing is good for the long term but isn’t a great idea for money you know you need in the short term (i.e. the next five years).

How can I grow my money?

As we’ve discussed above, the best way to grow your money over the longer term – by more than inflation – is to invest it. However, whether you save or invest you still want to maximise your returns.

If you go down the savings route, that means finding the best interest rate you can get. Just remember, it’s important to make sure you choose a savings account with a reputable bank that’s authorised by the Financial Conduct Authority and covered by the FSCS.

Head over to our Cash savings hub where we've collected some of the best interest rates in the market, and all of our accounts are protected by the Financial Services Compensation Scheme (FSCS) covering up to £85,000 per bank.

All of our investment accounts are also covered by the FSCS scheme, so if you decide to invest, you’ll want to pick investments that offer the best balance between returns on the one hand, and risks on the other. It can be tricky – but you can get a little help, or a lot, by picking one of our investment ideas.

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