Saving is a way of storing your money until you need it. Whereas investing is about putting your money to work for you – and with this comes more risk

What is saving?

Saving is setting aside some of your money for future use, rather than spending it. You can add to your savings in one-off or regular payments. And if you use it, you can easily get back what you put in – plus the interest you’ve earned – whenever you want it.

Is saving risk-free?

Not exactly. Interest rates can go up and down. When interest rates are low, the return you’ll get on your money will be very modest. The risk is that it won’t beat inflation – the rate at which the prices of goods and services increase. So, while the money in your savings account isn’t going anywhere, its purchasing power drops over time. In other words, it will buy you less.

What is investing?

Investing is another way of setting aside money for the future, where you invest your money into something with the aim of making a profit in the long run. 

There are different ways to invest, which typically involve charges or fees. 

Perhaps the most well-known are:

• Equities or Shares – where you buy a tiny slice of an individual company, and

• Funds – where you buy into a ready-made basket of investments that are managed for you by an expert

When you invest, you’re exposed to a different type of risk – exposure to the markets. 

The value of your investment can, and will, fluctuate, so you can get back less than you put in. Your expected returns can also fluctuate and are not guaranteed. 

Ideally, aim to invest for 5 years or more. A longer time frame gives your investment more time to recover if it falls in value. By planning when to access your money, you can manage the risk you take.

Why take any risk? Well, for a start, not all investment risk is equal. And the benefit of taking a calculated amount of risk is – it gives you the potential to make more money than you would from a savings account. 

Is saving or investing right for you?

If you have more than one goal you’d like to put your money towards, you might consider a combination of saving (for short-term goals) and investing (for long-term goals).  

Work out how much you can afford to put away each month. Creating a budget can help you do this. 

When you have a figure in mind, think about what you might need the money for and when.

It’s helpful to split your money among several pots:

• Unexpected things that could happen

Before you save for anything else, you should build up an emergency fund of at least 3 months’ worth of living expenses to fall back on. Ideally, this should be in an easily accessible savings account.

• Things you plan to do within the next 5 years

If you need money in the short-term, such as a home deposit, saving makes sense. Investing for less than 5 years will give your investment less chance to make up for any fall in value.

• Things you plan to do within 5 to 10 years

For medium-term money, maybe to pay for a wedding – saving could make sense. Although, if you’re prepared to take some risk – investing in funds could earn you a greater return on your money.

• Things you want to do at least 10 years from now

For money you may not need straight away, such as a retirement fund – taking a degree of investment risk could earn you a greater return, as the value of your savings will get eroded by inflation over time.

The golden rule

Save for what’s around the corner and invest for the future.