Investing versus saving: the basics

Important information - The value of investments and the income from them can go down as well as up, so you may get back less than you invest.

Do you need a deposit to buy a house? Have you got a big milestone birthday coming up and want to celebrate in style? Has your child told you they’ve just got engaged? Do you want to send your child or grandchild to private school or university?

The thing about having financial goals is that they often cost a pretty penny. If you haven’t got that kind of money already set aside, you’ll need to put a plan in place.

But should you save or invest?

Both are essential for your financial wellbeing, but they serve different purposes and have different strengths.  So, first let’s take a closer look at what they mean.

What is saving?

Saving is where you set aside a portion of your income for short-term needs or emergencies. Savings are typically stored in easily accessible accounts, such as savings accounts, money market accounts, or certificates of deposit (CDs). The goal of saving is to ensure liquidity (which basically means how quickly and easily you can convert an asset into cash without significantly affecting its value) and safety, so that you’ve a cushion for unexpected expenses or planned purchases in the near future. 

Key characteristics of saving

• Low risk: Savings are protected from market fluctuations, making them a secure option.
• Low returns: Interest rates on savings accounts are often minimal, sometimes not even keeping pace with inflation.
• High liquidity: Savings are easily accessible for immediate use.
• Ideal for short-term goals: Examples include an emergency fund, a vacation, or saving for a car.

What is investing?

Investing involves putting your money into assets such as shares, bonds, funds, or commodities like property, with the expectation of earning a return over time. Unlike saving, investing carries risk, as the value of investments can fluctuate due to market conditions. The goal of investing is to grow wealth and outpace inflation over the long term.

Key characteristics of investing

• Higher risk: Investments are subject to market volatility and potential losses.
• Higher returns: Over the long term, investing has the potential to deliver significantly higher returns than saving.
• Long-term growth: Investing is most effective when aligned with goals like retirement, buying a home, or funding education.
• Diversification: Spreading investments across various assets reduces risk and enhances potential returns.

To save or to invest? That is the question.

The choice between saving and investing depends on your financial goals, time horizon, and how comfortable you feel with risk.

You might want to save if:

• You need an emergency fund covering 3–6 months of expenses.
• Your goal is within the next 1–3 years, such as saving for a vacation or wedding.
• You need to preserve capital and prioritize safety over returns.

You might want to invest if:

• Your goal is long-term (5+ years), such as retirement or a child’s university fund.
• You’re comfortable with market fluctuations and potential risks.
• You aim to grow your wealth and combat inflation over time 

The reality is that it’s healthy to balance saving and investing

It needn’t be an ‘either/or’ decision, and you can put your money into a healthy mix of both savings and investments – one for the short term and one for the long term. It's also a good idea to have some savings set aside before investing and not have any debt weighing you down. If your circumstances change, it can be tempting to dip into your investments, which would affect the long-term growth of your investments. So always keep some money aside for any surprises.

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Here’s a checklist as to how you might go about trying to strike a balance

• Build a safety net: Start with an emergency fund that can cover unexpected expenses.
• Define your goals: Prioritize your financial goals by timeline and importance.
• Pick and choose: Use savings for short-term needs and emergencies, and invest for long-term growth.
• Revisit your plan: Regularly review and adjust your savings and investment strategies based on life changes and market conditions.

Want to invest? Follow these simple steps

• Choose the account that’s right for you
• Choose your investments
• Become a smarter investor - sign up for expert insights

Read more from our series:

• What is the FTSE 100? The basics
• What is volatility? The basics
• Investing in cash in a Stocks and Shares ISA: the basics