Saving vs. investing

It’s never too early to start saving for your future. Whatever your situation, saving regularly can help your financial wellbeing.

It’s important to set aside money in a savings account. Your goals might include a deposit on a home or expenses like a holiday, or even an emergency, like an expensive gadget breaking down.

Before you consider your investment options, it’s best to have an emergency fund in case something unexpected happens. Having three to six months’ living costs in a savings account is a safe amount for a rainy day.

In a savings account, your money grows slowly through interest, and is usually easy to access when you need it. The interest rates that you can get from savings accounts usually relate in some form to the Bank of England base rate.

When the base rate moves up or down, savings account interest rates move up and down too. However, savings providers may offer rates that are a bit higher than the base rate, and some may offer rates that are a bit lower.

It’s important to shop around to get the best interest rate. But even a good rate doesn’t always mean your money is really growing.

If your savings grow at the same rate as prices, your money is only keeping up with inflation, not getting ahead. For example, if your savings go up by 3% in a year, and prices also go up by 3%, your money hasn’t really grown. It can still buy the same as before. No more, no less.

And if prices rise faster than your savings, your money actually loses value. So even if the number in your account goes up, what you can buy with it might not.

You can use comparison sites to compare savings accounts or ISAs. ISAs, or Individual Savings Accounts, might provide you with even better rates.

For long-term goals, you might consider investing. Investing is putting some of your income, money you’ve earned, or money you’ve been given through inheritance and gifts, into something that could help make you more money over time.

You can think of investing like putting an acorn into the ground and watching as it slowly becomes an oak tree, which you trust will give you more acorns in the future. The aim may be to build wealth over many years for your retirement, your children’s future, or other financial goals.

Let’s look at two case studies. Colour Sergeant Robert has recently returned from deployment. He wants quick, guaranteed access to money in case of emergencies or unexpected costs. For Robert, putting aside a set amount each month into a high-interest savings account or a Cash ISA gives him quick access when needed, no market risk and a secure way to build a financial buffer. So for Robert, staying financially ready with easy access to his funds is important.

Pilot Officer Anna aims to build wealth for the long term, possibly to gift her daughter a house deposit in 10 years, and some money for retirement after leaving service. Depending on her goals, Anna might choose a Stocks & Shares ISA for long-term growth towards a house deposit, or a Self-Invested Personal Pension (SIPP) for retirement planning. These options involve more risk than savings, but also more potential growth over time.

Potentially, investing can grow your money faster than if you keep it in a regular savings account. If you invest in shares, for example, their growth comes from expansion of the businesses, and the ability of companies to pass on higher costs to consumers.

Investing also has the potential to beat the rate of inflation. If you invest in property, for example, the value of buildings and the rental income have also tended to rise with inflation.

However, none of this is guaranteed. When you start investing, it is wise to invest money that you will not need access to, with the understanding that you might not get the expected return.

Investing can earn higher returns than a savings account, especially over the long term, but it also carries risk. The value of your investments can rise and fall. This means that you may get back less than you put in.

But, if you keep money in a savings account it is safe and you won’t lose it. The downside is that the original amount that you put in doesn’t have the potential to grow and beat inflation. This means it could be worth less in the future.

It’s a careful balance, and that’s why savings and investments work best together.

When it comes to investing the key thing to remember is time is your best friend. The longer you invest, the better your chances of getting a positive return. Even small amounts grow over time, and we’ll show you exactly how compound interest makes your money grow in another video.

Savings offer security and quick access to money when you need it. Investing can help your money grow over a longer period of time. Used together, savings and investing help you stay prepared for today while building wealth for the future.