The biggest difference between saving and investing is the level of risk taken. Saving typically results in you earning a lower return but with virtually no risk. In contrast, investing allows you the opportunity to earn a higher return, but you take on the risk of loss in order to do so.
How are saving and investing similar?
- Saving and investing have many different features, but they do share one common goal: they’re both strategies that help you accumulate money.
- Both use specialised accounts with a financial institution to accumulate money. For savers, that means opening an account at a bank, such as Savings account. For investors, that means opening an account with an Independent Financial Adviser.
When to save money
- If you’ll need the money in the next few years, a savings account, or premium Bonds will likely be best for you.
- If you haven’t built up an emergency fund yet, you’ll want to do that before you dive into investing. Most experts suggest having three to six months worth of expenses set aside in an emergency fund.
- If you’re carrying debt such as a credit card balance, it’s best to work toward paying it down before investing. Paying off a loan with a high interest rate will likely give you a better return than you can earn investing.
When to invest money
- If you don’t need the money for at least five years and you’re comfortable taking some risk, investing the funds will likely yield higher returns than saving.
- If you’re eligible for an employer contribution to your pension, contributing enough money to ensure you receive this is key, because it is like free money.
Real-life examples are the best way to illustrate this. For example, paying your child’s college tuition in a few months should be in savings, a savings account, Premium Bonds or NS&I account.
Instead of ‘Well, I have a year and I’m buying a house or something, maybe I should invest in the stock market,’ That’s really gambling at that point, as opposed to saving.”
And when is investing better?
- Investing is better for long term and is money you are trying to grow more aggressively. Depending on your level of risk tolerance, investing in the stock market, exchange-traded funds or mutual funds may be an option for someone looking to invest.
- When you are able to keep your money in investments longer, you give yourself more time to ride out the inevitable ups and downs of the financial markets. So, investing is an excellent choice when you have a long time horizon (ideally many years) and won’t need to access the money anytime soon.
