Investing: Savings vs investing

It’s never too early to start saving for your future. 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, even an emergency, like a broken washing machine. Before you consider your investment options, it’s best to have an emergency fund in case something unexpected happens.

Having three to six months of 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 base rate. Some may offer rates that are a bit lower. It’s important to shop around to get the best rate possible, but a good interest rate does not always mean that your money is beating inflation. For example, if you put your money in a bank account that pays 3% interest, you’ll have 3% more money after a year. But if inflation is more than 3%, your money still won’t buy as much as it did before.

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. 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’s 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 that 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.

Related Resources go here…