Wealth management

Saving or investing: what’s best for me?

Person adding coins in a glass jar as savings

More people are currently saving than ever before. A recent survey suggested that 37% of respondents saved more money during the coronavirus lockdown as expenses such as commuting, leisure costs and eating out evaporated overnight. What’s more, nearly all respondents say they expect to continue living more frugally. 

However, this wave of savings enthusiasm has come at a time where interest rates have hit rock bottom due to the Bank of England’s (BoE) base rate slash back in March, as it attempted to shore up the failing economy. 

Meanwhile, the economic impact of the pandemic on global financial markets has been a topic of much concern and discussion, with investors worried about the future of their investments as markets continue to fluctuate. 

However, the current situation won’t last forever and it continues to be important to have a strategy for your finances that addresses both your short and longer term goals.

Here we take a look at savings and investments and the differences between them to help you decide which option – or whether a mix of both – is best for you.

What does ‘savings’ mean?

Saving means setting a part of your disposable income aside in order to save it for a future expense. This might be a holiday or a new kitchen, for example, or you may just wish to build up some funds for emergencies. 

Savings can be made into a bank account, either in a lump sum payment (for example, if you have inherited some money) or in regular instalments. The type of bank account you choose will affect the interest rate you’re able to get. For example, instant access accounts tend to offer a lower rate because they allow you to withdraw your money at any time. Meanwhile, a fixed savings account may offer a higher rate if you’re in a position to lock away your money for a set period (for example, two years). 

What are the advantages of saving?

The main advantage of saving your money is that it is considered as a safe bet. Once your money is stored away, it isn’t going anywhere. What’s more, if your bank or building society goes under, you’ll be able to get up to £85,000 of your money back through the Financial Services Compensation Scheme (FSCS).

What are the disadvantages of saving?

While saving is considered safer, it may provide lower returns. This is especially true in the current climate, with the BoE base rate at a record low of 0.1%. At the moment, this means that your savings will not grow in line with inflation – i.e. the value of your savings will erode as prices rise. So, while you may not be at risk of losing your money in the same way as with investing, you do risk the purchasing power of that money lessening over time. 

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What does ‘investing’ mean?

Investing is similar to saving in that it also involves setting part of your income aside for the future. The key difference is that, rather than a savings account, this money is invested in assets such as stocks and shares, bonds or property, with the hope that you’ll end up with more money than you originally invested. The value of your money then depends on the performance of these assets and will rise and fall according to market conditions. 

If you are a first-time investor or uncertain about the types of assets you should invest in, then you can also invest in funds. With a fund, your money will be pooled with other peoples’ investments, enabling you to invest in a wider and more diverse range of assets. 

The first advantage of funds is that they are carefully selected and overseen by an expert fund manager, so you’ll benefit from a professional’s expertise and knowledge of the markets you’re looking to invest in. Secondly, because a fund enables you to invest across a wide range of assets (otherwise known as ‘diversifying’ your investments), it won’t be as risky if one of them underperforms. 

What are the advantages of investing?

With investing, you are putting money into an asset with the hope that it will grow in value and result in higher returns. 

Essentially, while the value of investments can rise and fall, they have greater potential to grow in the long-term. Historically in the UK, investing in shares has resulted in higher returns than cash or even commercial property. 

Furthermore (and contrary to popular belief), you can get back money tied up in investments. This is called disinvesting. Unless you’ve invested on a fixed-term basis, you can usually withdraw your money without penalty. It should be noted that this carries the risk of your investment being worth less when you need to withdraw your money. 

What are the disadvantages of investing?

As we have previously mentioned, investing is a riskier financial strategy, and getting higher returns usually means taking on a higher level of risk – which some people are not prepared to do. Also as mentioned above, if you suddenly need your money back, disinvesting it carries the risk of you getting back less than you originally put in. This is why saving your money is probably a better bet if you think you are going to need to withdraw it in the short term. 

Another disadvantage, and one that causes many would-be investors to cling to the safety of saving, is the perceived complexity of investing and the financial markets. Dividends, portfolios, volatile markets, ESG… the terminology can seem confusing and off-putting to the first-time or inexperienced investor. 

This is where the expertise of financial advisers and wealth managers comes in. We will be able to assess your risk profile (the level of risk you’re willing to accept) and help you create and manage an investment portfolio that suits your long-term goals. 

So, should I save or invest?

This decision is entirely dependent on your goals and what you want your money for. Ideally, you would do a bit of both. For example: 

  • Emergencies or unexpected payments

If you don’t know when you’ll need to withdraw your money, but may need it in an emergency (for example, if you need cash for car repairs, or your laptop stops working and you need to buy a new one), then you should save your money in an instant access savings account. 

  • A short-term goal

If you’re looking to raise money for a short-term goal, for example a holiday next year, or baby clothes and toys when you find out you’re expecting, then saving your money will work best. You can be sure you won’t lose any money when you come to withdraw it, and there won’t be time for inflation to begin eroding the value of your savings. 

  • A medium-term goal

Looking ahead five or 10 years, you may be looking at helping your child get onto the property ladder or pay for their wedding. Here, saving could still make sense, and you may be able to get a better rate if you lock your money away in a fixed savings account. However, if you’re willing to accept a certain level of risk, then investing may produce better returns. 

  • A long-term goal

Investing is probably a better option for anything you want to do far into the future (for example, buying your dream retirement home or providing an inheritance to your children or grandchildren). This is because it’s likely that inflation will erode the value of your savings over time, while investment is likely to produce better long-term returns. 

Expert advice, here to help you

Whatever your goals and risk appetite, our experienced Independent Financial Advisers are here to help. We can talk you through the various savings and investment options available, enabling you to make informed choices based on your individual financial goals.

Tees is here to help

We have many independent financial advisers who are based in:

EssexBrentwoodChelmsford, and Saffron Walden
HertfordshireBishop's Stortford and Royston

But we can help you wherever you are in England and Wales. 

This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Past performance is not a reliable indicator of future returns and all investments involve risks including the risk of possible loss of capital. Some information quoted was obtained from external sources we consider to be reliable.

Tees is a trading name of Tees Financial Limited which is authorised and regulated by the Financial Conduct Authority. Registered number 211314. Tees Financial Limited is registered in England and Wales. Registered number 4342506.

Chat to the Author, Christopher Longman

Senior Wealth Planner, Wealth Management, Chelmsford office

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