Should I save or invest my money?

Deciding whether to save or invest depends on your financial goals, risk tolerance, and time horizon. Saving is generally best for short-term goals (less than 5 years), offering lower risk but lower returns. Investing is suitable for long-term goals (5+ years), as it comes with higher risk but the potential for greater returns.

What is the difference between saving and investing?

Saving involves putting money in low-risk, easily accessible accounts, like savings accounts or cash ISAs, with the goal of preserving capital. Investing involves purchasing assets such as stocks or bonds with the goal of growing your wealth over time, but it carries a higher risk of losing money, especially in the short term.

When should I focus on saving instead of investing?

You should prioritise saving if you are building an emergency fund or saving for short-term goals, such as a down payment on a house or a holiday. Savings accounts provide security and liquidity, making them ideal for immediate or near-term financial needs.

When should I invest my money instead of saving?

Investing is best for long-term financial goals, such as retirement or education funds. If you have covered your short-term needs and are comfortable with the risk, investing in stocks, bonds, or mutual funds allows your money to grow over time through compounding returns.

What are the risks of investing compared to saving?

Investing comes with higher risks, including market volatility, which can lead to short-term losses. However, over a long-term horizon, investments typically provide better returns than savings accounts. Savings, on the other hand, offer lower returns but guarantee that your principal is protected.

How do I balance saving and investing?

To balance saving and investing, first establish an emergency fund and cover your short-term financial needs. Once these are in place, focus on investing for long-term goals by diversifying your portfolio across asset classes to manage risk while pursuing growth.

OPTIMLY Guides | Save or Invest Guide

Save or invest

Overview

Deciding between saving your money or investing it is a key financial decision. Both saving and investing have unique benefits and risks, and the right approach depends on your financial goals, time horizon, and risk tolerance.

In this guide, we'll help you understand when it makes sense to save and when investing might be a better option.

1. Saving and investing overview

Deciding whether to save or invest is an important step in managing your financial future. Saving and investing serve different purposes, and understanding the key differences between the two will help you align your financial strategy with your goals. Generally, savings are meant for short-term needs and offer lower risk, while investing focuses on long-term wealth growth and comes with higher potential rewards but also greater risks.

Savings

Saving typically involves putting money in low-risk, highly liquid accounts that are safe and easy to access. The goal is to preserve your capital while earning modest interest.

Purpose: - Saving is generally for short-term financial goals, such as building an emergency fund, buying a car, or going on holiday. It's about keeping your money safe and accessible with minimal risk.
Capital risk: - Savings are typically kept in savings accounts, premium bonds, or cash ISAs, where the risk of capital loss is minimal.
Liquidity: - High. Savings are easily accessible and can be withdrawn quickly, making them ideal for emergencies or near-term financial needs.
Growth: - Limited. Savings accounts offer modest interest rates, which may not keep up with inflation, meaning your purchasing power could decrease over time.

Investing

Investing involves putting money into assets like stocks, bonds, or funds with the expectation of achieving higher returns over time. However, investing comes with a higher level of risk, including the potential to lose money, especially in the short-term.

Purpose: - Investing is best suited for long-term financial goals, such as retirement. The focus is on capital growth rather than immediate access to funds.
Risk: - Higher risk. The value of investments can fluctuate, and there's the potential for both gains and losses. The longer the time horizon, the better positioned you are to recover from market downturns.
Liquidity: - Lower. Investments can be harder to access quickly without penalties or selling at a loss, so they're not ideal for short-term needs.
Growth: - Higher potential growth. Over the long term, investments tend to outperform savings accounts, offering the potential for significant returns through the power of compounding.

2. Types of savings and investment products

Understanding the different types of savings and investment products available is key to building a sound financial strategy. The choice between saving and investing depends on your financial goals, risk tolerance, and time horizon. Let's explore some of the most common options for both saving and investing.

Savings products

Savings products are designed to keep your money safe and accessible, with minimal risk but lower returns compared to investments.

Cash ISAs: - A cash ISA is a tax-free savings account where the interest you earn is shielded from income tax. It's ideal for short-term savings and can benefit from easy access.
High-interest savings accounts: - These accounts offer higher interest rates than standard savings accounts, helping your money grow faster, although they may have withdrawal limits, penalty-fees or require a minimum balance.
Premium Bonds: - Instead of earning regular interest, Premium Bonds offer a chance to win tax-free prizes through a monthly draw (lottery). Your capital is secure (up to £50,000), but returns in-part depend on luck rather than guaranteed interest.
Fixed-rate bonds: - These savings accounts lock your money away for a set period, usually offering a higher interest rate in return.

Investment products

Investment products aim to grow your wealth over the long term, but they come with higher risk and the potential for both gains and losses.

Stocks: - Buying shares in a company gives you part ownership, and your returns come from both potential dividends and the growth in share price. Stocks offer high growth potential but can be volatile.
Mutual funds and ETFs: - These funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. They provide diversification and professional management, making them popular with investors looking for long-term growth.
Bonds: - Bonds are loans made to companies or governments in exchange for regular interest payments. They are considered lower risk than stocks but generally offer lower returns, making them suitable for more conservative investors.
Stocks & shares ISAs: - This tax-efficient wrapper allows you to invest in a range of assets, including stocks and funds, with any growth and dividends being tax-free. It's ideal for long-term investing with a focus on capital growth.

3. When to save

Saving is the foundation of financial stability and typically is the first step in any financial plan, as it provides a safety net for unexpected expenses and short-term goals.

Saving should be a top priority when preparing for immediate or short-term financial needs, such as building an emergency fund, saving for a vacation, or planning a major purchase like a car. The objective is to keep your capital secure in a low-risk, easily accessible account.

However, one downside of saving is that the returns are typically lower compared to long-term investments. The key is finding the right balance between saving for short-term needs and investing for long-term growth.

Short-term financial goals: - If you plan to use the money within the next 1-3 years, it's safer to keep it in a savings account where the value won't fluctuate.
Emergency fund: - Building an emergency fund should be a priority. Experts recommend saving 3-6 months of living expenses in a liquid, easily accessible account to cover unforeseen expenses like medical bills or car repairs.
Low risk tolerance: - If you're risk-averse or uncomfortable with market volatility, saving in a secure account like a cash ISA or premium bonds will help protect your money from potential losses.
High liquidity needs: - Savings accounts offer high liquidity, meaning you can access your funds quickly without penalties. This is crucial for covering immediate or emergency expenses.

4. When to invest

Investing is about growing your wealth over the long term. Unlike saving, investing involves taking on more risk in exchange for the potential for higher returns. But when should you consider investing your money instead of saving it?

Investing is best suited for long-term goals, such as retirement or buying a home in 5-10 years. While investments come with a higher level of risk, they offer greater potential for returns compared to savings, especially when inflation is considered.

Long-term financial goals: - If you have financial goals that are 5 or more years away, such as retirement or buying a house, investing allows your money to grow over time through compound returns.
Higher risk tolerance: - Investing involves greater risk, as the value of your investments can fluctuate. If you're comfortable with market ups and downs and are prepared to hold investments over the long term, investing could offer higher rewards.
Inflation protection: - Investments, particularly in stocks, tend to outperform inflation over time, preserving and growing your purchasing power. This is especially important during periods of rising inflation, which can erode the value of cash savings.
Potential for higher returns: - Over time, investments such as stocks, bonds, and mutual funds have historically offered higher returns than savings accounts. The longer you invest, the more time your money has to grow through the power of compounding.

5. Key factors to consider

When deciding between saving and investing, several key factors come into play. Your financial goals, time horizon, risk tolerance, and the impact of inflation are all important considerations. Let's explore each of these in detail to help you make an informed decision.

Time Horizon

The length of time you plan to keep your money invested is crucial in determining whether to save or invest.

Short-term goals (0-5 years): - Save. If your financial goal is close, such as saving for a wedding, holiday, or emergency fund, it's safer to save in a low-risk, liquid account like a savings account or cash ISA.
Long-term goals (5+ years): - Historically, investing offers better returns compared to savings accounts. However, in the short term, it is subject to volatility, which means your investments may fluctuate in value. Over a longer time horizon, though, you have more opportunity weather market fluctuations and potentially achieve higher returns.

Risk Tolerance

Your risk tolerance, or comfort level with the possibility of losing money, plays a significant role in whether saving or investing is the right choice.

Low risk tolerance: - If you are uncomfortable with the idea of losing money, saving in a secure, low-risk account is a better option. The money you save will be safe, though the returns may be lower.
High risk tolerance: - If you can handle fluctuations in the value of your investments and are focused on long-term growth, investing in stocks, bonds, or funds may offer better returns.

Financial Goals

Your financial objectives also help determine whether you should save or invest.

Short-term needs: - If your goal is immediate or within the next few years (e.g., building an emergency fund or saving for a purchase), saving is the right strategy.
Long-term growth: - For long-term goals like retirement, investing offers the potential for higher returns through compounding and market growth over time.

Inflation

Inflation erodes the purchasing power of your money over time. Understanding how inflation affects your savings and investments is critical.

Saving: - Savings accounts generally offer lower returns that may not keep up with inflation, meaning the real value of your money decreases over time.
Investing: - Investments, especially in stocks, tend to outperform inflation over the long term, helping to preserve and grow your purchasing power.

Liquidity

Liquidity refers to how quickly and easily you can access your money without penalties or loss.

Saving: - Savings accounts are highly liquid, meaning you can access your money almost immediately without losing value.
Investing: - Investments may have lower liquidity, especially if selling them during a market downturn could result in a loss. They are better suited for longer-term goals.

Conclusion

Deciding whether to save or invest depends on your financial goals, time horizon, risk tolerance, and the effects of inflation. If you're focused on short-term needs and prioritising safety, saving may be the best option. However, if you're looking to grow your wealth over the long term and can tolerate more risk, investing could offer greater returns.

6. Balancing saving and investing:

Balancing saving and investing requires a clear and well-structured strategy. Below is a checklist outlining key steps to ensure you're addressing both short-term and long-term financial goals:

1. Build a small emergency fund:

Start by creating a small emergency fund, typically between 1 - 2 months worth of expesnses to cover unexpected events like car repairs. Keeping this money in a liquid, low-risk account, such as a high-yield savings account, ensures quick access when needed.

2. Repay high-interest debt:

Before focusing on saving more or investing, it's wise to prioritise repaying high-interest debt, such as credit cards. High-interest debt can erode your wealth quickly, often faster than many investments can grow, so paying this off first frees up more money in the long term.

3. Build a full emergency fund:

Once your high-interest debts are under control, focus on building a more comprehensive emergency fund. Ideally, this should cover 3 - 6 months of living expenses to provide a solid safety net in case of job loss, or other financial challenges.

4. Plan for short-term goals:

When preparing for short-term goals (typically within five years), choose savings accounts, which offer both security and liquidity. High-yield savings accounts, money market funds are good options. While these accounts may offer lower returns than long-term investments, they protect your principal while providing modest growth to keep up with inflation and your short-term needs.

5. Invest for long-term goals:

Once your short-term financial needs are covered, shift your focus to investing for long-term goals, such as retirement or funding your child's education. Long-term investments allow for more risk, which can lead to higher returns, making them suitable for goals that are five years or more into the future.

Historically, stocks have outperformed other types of investments over the long run, making them a key component of many long-term portfolios. However, stock prices can be volatile, especially in the short term, so diversification is essential. By diversifying across asset classes—such as stocks, bonds, and mutual funds—you can reduce risk while still aiming for growth in your portfolio.

7. Save v invest projections

Try our simple to use calculator to calculate the growth of a savings account and project investment growth for high, medium and low risk portfolios. For greater functionality try our stand-alone save or invest calculator.

Simple calculator:

Inital balance:

Time period, years:

Monthly contribution:

Savings rate:

Investment growth rate:

Savings projection:

Investment projection:

What does this mean?