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Saving vs investing
It’s important to weigh up your options before choosing to save, invest, or even a bit of both.
How they compare
|
Feature |
Investments |
Saving |
|---|---|---|
|
Feature Interest |
Investments Highs and lows |
Saving Lower but more stable |
|
Feature Risk |
Investments Depends on the account |
Saving Low |
|
Feature Account types |
Investments ISAs Bonds Stocks Mutual funds Exchange-traded funds (ETFs) |
Saving ISAs Savings accounts |
|
Feature Term |
Investments Five years or more |
Saving Five years or less |
|
Feature Cost |
Investments Depends on the account |
Saving None |
|
Feature Skill level |
Investments Depends on the account |
Saving None |
|
Feature Flexibility |
Investments Depends on the account |
Saving Depends on the account |
Important to know: the value of investments and the income from them can fall as well as rise, and you may get back less than you invest. If you’re not sure about investing, you might like to seek financial advice. Just be aware that charges might apply.
More on investments
When you invest in the financial market, prices can go down and up. There’s a chance that you’ll get back less than you put in, especially if you can’t wait for prices to recover after they fall.
Why invest?
- Potential to earn higher returns.
- You're looking for a long term investment - 5+ years.
Make sure you consider:
- The value of your investments can go up and down as they are higher risk – nothing is guaranteed.
- To withstand market fluctuations, it’s recommended that you hold an investment for five years or more.
- Seek independent financial advice if you’re unsure about anything. Charges might apply.
- Trading and other fees might apply.
More on saving
Savings accounts might offer lower returns, but you’ll usually get back everything you put in, plus a bit extra in interest. If you need to withdraw money before the end of a fixed term, just be aware that fees could apply.
Why save?
- Low risk.
- Short term.
- Predictable interest.
- Flexible withdrawals.
- Minimal account costs – charges might apply to withdrawals made before the end of a fixed term.
Make sure you consider:
- By choosing a low-risk account, the potential gains could be more limited.
- A fixed rate/term account can provide better returns, but it won’t be as easy to access your money.
- Variable interest rates can go up or down, usually following the UK Base Rate.
Getting value for money?
As prices rise on everyday goods and services, inflation can undermine the spending power of your money. To illustrate this, below is a very simple example:
Savings deposit: £5,000
Interest rate: two percent
Term: two years
Interest earned: £202
Closing balance: £5,202
This assumes that there have been no withdrawals or additional deposits during the account term.
But, over the same period, imagine that the rate of inflation had increased by three percent each year. Accounting for that, the spending power of your savings would be reduced to just £4,895.
If you can save at an interest rate that’s higher than inflation, the future value of your money should be protected.
Before you tie up your money
It’s sensible to keep some money aside, so you can access it easily in an emergency. It’s your safety net, so it should be as large or small as you’re comfortable with. It’s often recommended that you have enough money set aside to cover your living expenses for at least three to six months.
If you’re paying more interest on debts than you might hope to earn on savings or investments, you should aim to pay those debts off first.
FAQs
-
The government set limits on how much interest you can earn from your savings or investments before you need to pay tax. Check out the following guides to learn more:
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What and where you save or invest is up to you. Just make sure you weigh up any potential risks and costs, as well as any gains.
And, you don’t have to deposit large sums. At Halifax, you can start with as little as £1 in selected savings accounts, or £50 a month in Ready-Made Investments.
Of course, as you gain knowledge and confidence, you might like to pick your own investments.
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All investments present a level of risk – some more than others. But before you discount the idea of investing completely, it might help to consider your goal and how soon you want to achieve it.
Short-term goals – less than five years
It can take time for an investment to recover from a market downturn. Based on that alone, for short-term goals, a savings account might suit you best.
If you can afford to lock your money in for a year or more, instead of an easy access savings account, you might choose a fixed rate savings account. By accepting less flexibility, you could maximise what you can earn in low-risk interest. Just be aware that fees could apply to early withdrawals.
Medium-term goals – five to ten years
Cash savings offer slow and steady growth, but if you can afford time as well as money, investing could provide better returns over a longer period.
Obviously, the aim is to cash in your investments when the price is strong, remembering to account for any account fees.
There’s nothing to stop you splitting your money between savings and investments, helping you to manage both short and longer-term goals.
Long-term goals – ten years or longer
The longer you leave your money in a savings account, the more likely it is to be eroded. That’s unless you’re always earning interest at a higher rate than that of inflation.
Even accounting for market ups and downs, investing might provide a better return over a long term.