James Phang

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Should I Save or Invest?

Important Note: This is not personal advice. If you are not sure whether an investment is right for you please seek advice. If you choose to invest the value of the investment will rise and fall, so you could get back less than you put in.

You might be undecided between saving your money in a savings accounts or investing your well-earned money in stocks and bonds. You can go in circles deciding what to do with your money. I hope that this guide will help you work out what is right for you. When making an informed financial decision you will need to take a step back and focus on what you want from your money.

What is Saving?

Saving involves setting aside some of your money for the future. You can add to your savings in regular or one-off payments. If you are using an easy access account, you can get back what you put in any time of the day. Your savings account is safe and protected under the Financial Services Compensation Scheme. The scheme will allow you to get back up to £85,000 of your savings. The money saved in the savings accounts earns interest. However, this will never beat interest rates set by the bank. Interest rates could be lower than inflation rates therefore the purchasing power of your money saved will erode over time, meaning you will buy less. If you are not sure what inflation is, see my ‘How Does Inflation Work?’ post.

Interest Rates: Tells you how high the cost of borrowing is or high rewards are for saving.

Who Should be Saving?

Emergency Fund

The general rule is that you should have at least three months’ worth of living expenses saved in an instant access savings account. The emergency fund should cover rent, food, school fees and other essential outgoings. To work out your expenses, it's best to note down your typical monthly expenses and calculate three months’ worth from that.

Saving Short-Term

Once you have an emergency fund, you should continue to save a bit more if you can afford it. Set yourself savings goals and put away enough to buy what you want. This could be ranging from your next technology purchase to a house deposit or holiday trip.

What is Investing?

Like saving, investing is also setting aside money for the future. There are many ways to invest, the most known is via shares which will allow you to buy a slice of an individual company. Another way is to invest in funds that you buy into a ready-made basket of investments that are managed for you by an expert. When investing, you are putting money into something that you believe will go up in value over time. This is when you are exposed to different types of risk exposure to the market. The value of your investment can go up or go down meaning you could get back less. You should aim to invest for 5 years or more. A longer time frame allows your investment more time to recover if it falls in value.

Are You Ready to Invest?

You should only consider investing when you have your debt under control. Choosing whether investing is right for you depends on:

  • How much cash you have available – Whether you can afford to not have access to this cash in 5 years

  • How old you are – Are you close to retirement

  • What your circumstances are – You may have other financial commitments outside your normal expenses

You will also need to consider what your financial goals are:

I am saving for

  • Short-Term Goals (5 years)

  • Medium-Term Goals (5-10 years)

  • Long Term Goals (10 years+)

Short Term Goals (5 Years)

Investing for the short term is generally not great. Cash saved in a savings account does much better as markets can go up and down in the short term, not leaving enough time for your investments to recover leaving you at risk of losing some of your investment.

Medium-Term Goals (5-10 Years)

If you invest between 5-10 years, sometimes cash deposits are the best answer but depend on how much you are willing to risk with your money to achieve a greater return on your investment. For example, if you are saving for a house, you may want to keep it safe in a savings account.

Longer-Term Goals (10 Years+)

For longer-term goals, you would want to consider investing as inflation can seriously affect the value of your cash savings over the medium and long term. Stock-market based investments tend to perform better than cash over the long-term providing money is invested over time. You can lower your risk by spreading your money across different types of investments. This is called diversification.

Summary

When deciding whether to save or invest will depend on your situation and it will be unique to you. Consider what your goals are in the future, are you looking to buy a house or are you thinking of your future in 30 years? Take into account what you can afford now, whether you can afford to have money invested over a period. You should work out your expenses and see what money you have left and split the remaining money into different pots such as emergency funds, savings, and investment. It is essential that you have an emergency fund worth at least 3 months of your expenses and that you are in control of your debt.

Useful Resources

Everyday Money Budget Planner