Should I save or invest?
If you’re not sure whether you should save or invest, the answer is probably both. It all depends on your goals and your financial situation. This guide covers the basics to help you plan out your finances for short term savings and long term investment.
- What’s the difference between saving and investing?
- Who should save?
- Are you ready to invest?
- A look at some goals – save or invest?
- Set your savings goals
What’s the difference between saving and investing?
- Saving is putting money aside bit by bit, to make a lump sum. You usually save for a particular goal, like having the money for a holiday, a deposit on a house, or any emergencies that might crop up. Often saving is taken to mean putting your money into cash products, like bank and building society deposit accounts, and that’s how we define saving in this guide.
- Investing is taking some of your money and with the aim of making it grow, by buying things that might increase in value, like stocks, property or shares in a fund.
Who should save?
Everybody ought to have a certain amount of cash savings to hand. The rule of thumb is to have three months’ essential outgoings (things like rent and food) in an instant access savings account. This is called an emergency fund.
The only time you shouldn’t save or invest is if there are other, more important things you need to do with your money. This includes:
- Getting your debts under control
- Making sure your family could cope financially if you died
Once you have your emergency fund, you should keep on saving. A good goal is to be putting aside at least 10% of your earnings each month (or as you can afford it if your earnings are variable).
Aim for 5% to begin with and build it up. You can save up for anything you want, for example to pay for a wedding or to have enough money to invest in something specific.
It’s important to set savings goals so you know what you’re aiming for – more on how to do this later.
Are you ready to invest?
As with savings, you need to know your goals to decide if you should invest. Specifically, you need to know which of your goals are short-term, and which are long-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 rule is to save into cash deposits. The stock market may go up or down in the short term and if you invest for less than five years you might well make a loss.
For longer-term goals, it’s often best to invest 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 time. The longer you can leave your money, the more chance you have of making a profit.
For the medium term, cash deposits may sometimes be the best answer, but it depends on how much inflation risk you are willing to take, and whether you need a certain sum on a certain date.
You can adjust the level of risks you take when you invest by spreading your money across different types of investments – called diversifying the risks.
If you’re approaching or over 30, you should have at least one long-term goal – retirement. Money you put aside for retirement should usually go into investments. Most people invest in a pension, but other investments can be suitable too.
A look at some goals – save or invest?
|Goal||Situation and timescale||Save or invest?|
|Buy a new car||Your old car is ready to give up the ghost – you need a new one within a year.||Save|
|Put down a deposit on a house||You’d like to move in to your own home by the time you start a family – maybe in three years.||Save|
|Pay for your child’s wedding||Your child is still very young – probably at least 15 years away from getting married.
Your child is older – a couple of years away from getting married.
|Have a comfortable retirement||You’ve just turned 30, and you’d like to retire when you’re about 65 – 35 years in the future.||Invest|
Set your savings goals
As you can see, you probably have quite a few financial goals. They’ll all have different timescales, which means you want to do a bit of saving and a bit of investing. That’s why it’s important to make a plan.
If your finances are fairly simple, take a look at this guide to see how to set your goals:
If you have complex finances, with various assets and liabilities, you probably need to do a bit of thinking about you current situation before you set your goals. You should gather the facts together by doing a money fact find.
Rule of thumb
- If you’ll use the money in under five years, save.
- If you’ll use the money more than ten years in the future, invest.
- If you’ll use the money in between five and ten years, then consider your attitude to different risks, your investment goal and financial situation. In this situation, it may be suitable that you do a bit of both saving and investing.