Wondering whether you should save or invest? The answer depends on your goals and your financial situation. This guide will help you work out how to go about building up your savings and the best way to invest money. It also covers the basics of planning out your finances for short term savings and long term investment.
What’s the difference between saving and investing?
• Saving – is putting money aside, bit by bit. You usually save up to pay for something specific, like a holiday, a deposit on a home, or to cover any emergencies that might crop up, like a broken boiler. Saving usually means putting your money into cash products, such as a savings account in a bank or building society.
• Investing – is taking some of your money and trying to make it grow by buying things you think will increase in value. For example, you might invest in stocks, property, or shares in a fund.
Who should save?
1. Setting up an emergency fund
Everybody should do their best to build up an emergency savings fund.
The general rule is to have three months’ worth of living expenses saved up in an instant access savings account. This should include rent, food, school fees and any other essential outgoings.
Your emergency fund means you have some financial security if something goes wrong.
2. Keep saving
Now that you’ve got an emergency fund, it’s a good idea to save up at least 10% of your earnings each month (or as much as you can afford).
Set yourself savings goals and put away enough to buy what you want. This could be a house deposit, a wedding, or a trip.
You could also start to think about investing your money.
When shouldn’t you save?
The only time you shouldn’t save, or invest is if there are more important things you need to do with your money.
For example, getting your debts under control.
Are you ready to invest?
Whether or not it makes sense for you depends on your goals – specifically if they are long, short, or medium term.
• Short-term goals – are things you plan to do within the next five years.
• Medium-term goals – are things you plan to do within the next 5-10 years.
• Longer-term goals – are ones where you’re won’t need the money for ten years or more.
For your short-term goals, the general rule is to save into cash deposits, like bank accounts.
The stock market might go up or down in the short-term and if you invest for less than five years you might make a loss.
For the medium-term, cash deposits might sometimes be the best answer, but it depends on how much risk you’re willing to take with your money to achieve a greater return on your investment.
For example, if you’re planning to buy a property in seven years and you know you’ll need all your savings as a deposit and don’t want to risk your money, it might be safer to put your money into a savings account.
However, bear in mind that your savings will still be at risk from inflation.
This is where the interest you earn on your savings fails to keep up with the rate of inflation so the buying power of your money is reduced.
On the other hand, if your needs are more flexible, you might consider investing your money if you’re prepared to take some risk with your original capital to try and achieve a greater return on your investment than would be possible by saving alone.
For longer-term goals, you may want to consider investing because inflation can seriously affect the value of cash savings over the medium and long-term.
The stock market tends to do better than cash over the long-term providing an opportunity for greater returns on any money invested over time.
You can lower the level of risk you take when you invest by spreading your money across different types of investments. This is called diversification.
When investing it is a good idea to consider if you would benefit from professional advice from a regulated independent financial adviser.
Set your savings goals
As you can see from the table above, you probably have quite a few financial goals.
They’ll all have different timescales, which means you might want to do some saving and some investing. That’s why it’s important to make a plan.