Should I Save or Invest?

When setting your financial goals, you might be weighing up the benefits of a savings account versus investing. It’s essential to understand the differences, along with the pros and cons of each option, to make an informed decision. This guide explores both choices to help you determine which one aligns best with your financial objectives.

What’s the difference between saving and investing?

There are several key differences between saving and investing, with risk being a major factor:

Saving involves placing your money into a bank account, such as an Easy Access Savings Account, where it remains easily accessible. While in the account, your money earns interest, leading to slow but steady growth.
Investing means putting your money into an investment account, like a Stocks and Shares ISA. Instead of earning interest, your money’s growth is tied to the performance of assets such as stocks, which can potentially offer higher returns than could be achieved from cash savings, over the long term. However, this is a higher-risk option, as you aim for profit but also face the possibility of losing money. The value of your investment is likely to go up and down.

Saving vs investing: The pros and cons

You needn’t think of savings and investments as an either-or decision. It all depends on your goals, and there can be room for both in your financial plans. You may have some money you’re putting towards a longer-term goal, such as your retirement. If you’re happy to balance risk with the potential for bigger returns, investing could suit you.

Alongside this, you may have a rainy-day fund, to cover costs when life doesn’t quite go to plan. If you’d rather not take any risks and keep it easily accessible, saving might make more sense. Whatever you are looking to accomplish with your nest eggs, it’s worth thinking about what product is right for you.

Pros and cons of saving

Pros of saving

Less risk as your deposit is protected by the Financial Services Compensation Scheme (FSCS).
Consistent growth as your money earns interest steadily and reliably.
Ideal for short-term goals like saving up for a new TV or a holiday, and helps build a safety net for unexpected expenses.
Depending on the type of account, you may be able to withdraw your money when you want without penalties.

Cons of saving

Savings accounts typically offer lower returns overtime compared to investment returns as opposed to options and the impact of inflation can erode the purchasing power of your savings, making them less effective for long-term wealth growth.
Growth is at a slower/lower rate than investing.

Pros and cons of investing

Pros of investing

Potential for greater returns over time, to a traditional savings account.
Investing offers flexibility, allowing you to tailor your choices based on your risk tolerance. Some portfolios carry higher risks than others, so you can select investments that align with your comfort level.
Ideal for long-term objectives, such as retirement or educational funds for your children or grandchildren.
Better chance of staying ahead of inflation. With smart investments, stocks can grow at a higher rate than the annual inflation rate.
Investing has never been easier – with more "DIY" or "done for you approach" widely available, you can effortlessly buy and sell stocks and shares online with just a few clicks.

Cons of investing

Higher risk as you’re relying on the performance of assets like stocks. There’s a chance you could lose money.
Potential emotional highs and lows as stock performance changes.
Less accessible than savings accounts, and may be more difficult to withdraw your money if you need it.
Investing often requires time, and it may be a while before you see the results. This can be difficult for some people.
Stock picking without confidence or experience can lead to costly mistakes. Managed funds or advisors reduce this risk by handling investments for you, while DIY approaches require thorough research and discipline.

When should you invest?

Investing can be a smart choice if you have funds that you won’t need to access for a significant period, typically five years or more. The key to successful investing is time in the market. You can read more about this in our beginner’s guide to investing.

You must also be prepared to accept the risks involved. While investing has the potential to yield higher returns compared to saving, it also comes with the possibility of fluctuations in value. There’s always a chance that you might not recover your initial investment.

When should you save?

Saving might be a better option for you if your goals are short-term. It could be a holiday, a family event like a wedding or buying a property. Alternatively, it’s perfect for building up an emergency fund and having a safety net of money if any circumstances in life change, such as job loss.

You should also consider saving rather than investing if you think you’ll need to access your money. Savings accounts are more accessible and depending on the savings product selected, generally allow you to withdraw your money when you need it without penalties.

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