What Are The Main Differences Between Saving And Investing?

When it comes to managing your money, you’ve probably heard about saving and investing. But what are the main differences between saving and investing? Both can help you build wealth, but they serve different purposes and come with different levels of risk. Knowing when to save and when to invest is key to achieving your financial goals and securing your future.

What Is Saving?

Saving is the process of setting money aside for future use, typically for short-term goals or unexpected expenses. Unlike investing, saving prioritises security and accessibility over growth. The money you save is usually held in a bank account, such as a savings account, cash ISA, or even a fixed-term deposit, where it earns interest. While savings accounts provide stability, they do not offer high returns, making them best suited for situations where you may need quick access to your funds.

How Does Saving Work?

When you save money, you deposit it into an account where it remains secure and available when needed. Banks often pay interest on savings, but the rates are typically low, meaning your money does not grow significantly over time. However, the main advantage of saving is its reliability, you know exactly how much money you have, and there is no risk of losing it due to market fluctuations.

For example, if you’re saving for a holiday, you might set aside a specific amount each month in a savings account until you reach your target. Similarly, if you’re building an emergency fund, you would accumulate enough to cover three to six months’ worth of expenses in case of job loss, car repairs, or unexpected medical bills.

Where Can You Keep Your Savings?

There are several options for storing savings, each with different levels of access and interest rates:

• Easy-access savings accounts – You can withdraw money anytime, making them ideal for emergencies. However, interest rates are usually low.
• Cash ISAs – Offer tax-free interest on savings, making them a great option for UK savers. Some allow instant access, while others require a fixed term.
• Fixed-term savings accounts – Provide higher interest rates but require you to lock your money away for a set period. These are best for planned expenses that don’t require immediate access.
• Regular savings accounts – Encourage consistent saving requiring monthly deposits and offering slightly higher interest rates than standard savings accounts.

Pros of Saving

• Security – Your money is safe in a bank, and deposits are usually protected government-backed insurance schemes (such as the FSCS in the UK, which covers up to £85,000 per bank).
• Liquidity – Savings are easy to access, making them useful for emergencies and short-term financial needs.
• Simplicity – There’s no learning curve, and you don’t need to monitor investments or market trends.

Cons of Saving

• Low growth – Savings accounts offer little interest, so your money won’t grow significantly over time.
• Inflation risk – Over time, inflation can erode the value of your savings. If your interest rate is lower than the inflation rate, your money loses purchasing power.

When Should You Prioritise Saving?

• If you need money within the next few years
• When building an emergency fund
• If you want to keep money safe for an upcoming expense, like a wedding or car purchase
• If you’re uncomfortable with investment risks and prefer financial stability

While saving is essential, it’s important to recognise its limitations. For long-term financial growth, investing may be necessary to outpace inflation and increase wealth.

What Is Investing?

Investing is the process of putting money into assets with the goal of growing wealth over time. Unlike saving, where your money sits in a bank earning minimal interest, investing involves taking on some level of risk in exchange for the potential of higher returns. Investments can include stocks, bonds, property, mutual funds, and even businesses. While the value of investments can rise, they can also fall, meaning there is always a chance of losing money.

How Does Investing Work?

When you invest, you are essentially buying an asset that you expect to increase in value. Different types of investments work in different ways:

• Stocks (Shares) – When you buy shares in a company, you own a small part of that business. If the company performs well, the value of your shares increases, and you may also receive dividends (a portion of the company’s profits). However, if the company struggles, your shares may lose value.
• Bonds – These are essentially loans you give to a company or government. In return, they pay you interest over a set period. Bonds are generally lower risk than stocks but offer lower returns.
• Property – Investing in real estate means buying properties to rent out or sell at a higher price later. Property investment can be profitable, but it requires significant capital and carries risks like market downturns and maintenance costs.
• Mutual Funds and ETFs – These are collections of stocks and bonds managed professionals. They allow you to invest in a diversified portfolio without having to pick individual stocks yourself.

Example of Investing

Imagine you invest £1,000 in a company’s shares at £10 per share, buying 100 shares. Over five years, the share price rises to £20 per share. Your investment is now worth £2,000—double your initial amount.

However, if the company underperforms and the share price drops to £5 per share, your investment would be worth only £500, meaning you’ve lost half of your money. This is why investing always carries risk.

Pros of Investing

• Higher potential returns – Investments, particularly in stocks and property, tend to grow more over time than savings accounts.
• Beats inflation – Investing helps your money keep up with or outpace inflation, preserving its purchasing power.
• Wealth-building – Ideal for long-term goals like retirement, where you need substantial growth over decades.

Cons of Investing

• Risk of losing money – Markets fluctuate, and you may lose some or all of your investment.
• Less liquidity – Unlike savings, investments aren’t always easy to access. Selling stocks or property takes time.
• Market volatility – Investment values can rise and fall in the short term, which can be stressful for some investors.

When Should You Invest?

• When you have a long-term financial goal, such as retirement or building wealth over decades.
• If you have an emergency fund in place and can afford to take risks with extra money.
• When you want your money to grow faster than inflation.

While investing can be rewarding, it’s important to understand your risk tolerance and invest wisely. Diversifying your investments and thinking long-term can help manage risk and increase your chances of success.

To Save Or To Invest

Choosing between saving and investing depends on how soon you’ll need the money and how much risk you’re willing to take. While both play important roles in financial planning, they serve different purposes.

When Should You Save?

Saving is the best option when you need money in the short term or require easy access to funds. Because savings are safe and liquid, they’re ideal for expenses that you anticipate within the next few years.

Here are some key situations where saving is the better choice:

• Emergency Fund – Life is unpredictable, and having a financial cushion is essential. Experts recommend saving three to six months’ worth of living expenses in an easy-access account. This ensures you can cover unexpected costs, like car repairs, medical bills, or job loss, without relying on credit.
• Short-Term Goals – If you’re planning a holiday, buying a car, or saving for a wedding, keeping the money in a savings account is wise. The value won’t fluctuate, and you’ll know the money will be there when you need it.
• Upcoming Major Purchases – If you plan to buy a house within the next few years, saving your deposit is safer than investing. Investments can fluctuate in value, and you don’t want to risk your house deposit shrinking right before you need it.

Because savings accounts have low returns, keeping too much money in them for too long can mean losing purchasing power due to inflation. This is where investing comes in.

When Should You Invest?

Investing is better suited for long-term financial goals—anything more than five years away. Since investments take time to grow, the longer you leave your money invested, the better your chances of seeing good returns.

Here are key situations where investing makes sense:

• Retirement Planning – If you’re saving for retirement, investing in a pension or stocks and shares ISA can help your money grow significantly over decades. With compound interest and market growth, investing long-term can provide a much larger nest egg than saving alone.
• Building Wealth – Investing allows you to grow your money faster than inflation. Over time, assets like stocks, bonds, and property have historically outperformed savings accounts.
• Long-Term Goals (10+ Years Away) – If you’re saving for a child’s university fees or a future home purchase 10+ years down the line, investing can give your money time to grow and recover from short-term market dips.

A Simple Rule of Thumb

Before investing, make sure you have a strong financial foundation. A good rule of thumb is to:

1. Save first – Have an emergency fund with at least three to six months’ worth of expenses.
2. Save for short-term goals – Keep money you’ll need within the next few years in a savings account.
3. Invest for the long term – Once short-term savings are covered, consider investing extra funds to build wealth over time.

Striking a balance between saving and investing ensures you have financial security for today while growing wealth for the future.

Which Is Riskier?

Risk is an important factor when deciding between saving and investing. Both have their own types of risk, but they affect your money in different ways.

The Risks of Investing

Investing carries more risk because your money is not guaranteed to grow. While investments can increase in value over time, they can also decline due to market conditions.

Here are the main risks of investing:

• Market Fluctuations – Stock prices, property values, and other investments can rise and fall. If you invest in shares and the market crashes, your investment could lose value. For example, if you buy stocks worth £5,000 and the market drops 20%, your investment would be worth only £4,000.
• Losing Money – Unlike savings, where your money stays the same (aside from interest earned), investing carries the risk of loss. If a company you invest in goes bankrupt, you could lose all your money.
• Short-Term Volatility – Investments can be unpredictable in the short term. If you need your money quickly, withdrawing during a market downturn could mean selling at a loss.
• Not Guaranteed Returns – While investing has historically outperformed saving over long periods, there are no guarantees. Some years, the stock market grows significantly, while in others, it declines.

Despite these risks, investing can be rewarding if you have time to wait for markets to recover. The longer you stay invested, the better your chances of seeing growth.

The Risks of Saving

Saving is much safer than investing because your money remains stable, and bank accounts are typically protected deposit insurance (such as the Financial Services Compensation Scheme in the UK, which covers up to £85,000 per bank). However, savings are not completely risk-free.

Here are the main risks of saving:

• Inflation Erodes Value – Inflation reduces your money’s purchasing power over time. If inflation is 5% per year and your savings earn only 1% interest, your money is effectively losing 4% in real value. Over ten years, this could significantly weaken what your savings can buy.
• Low Growth – While saving keeps your money safe, it doesn’t grow much. Interest rates on savings accounts are often lower than inflation, meaning long-term savers could end up with less buying power.

Which One Should You Choose?

• If stability and safety are your priority, saving is the better option. It ensures your money is available when you need it, without the risk of losing value overnight.
• If growth and higher returns are your goal, investing is worth considering. While riskier, investing has historically provided higher returns over the long term, helping to build wealth.

The key is finding a balance. Keeping emergency funds and short-term savings in a bank account while investing for long-term goals allows you to manage both risk and reward effectively.

Do You Prefer to Save Rather Than Invest?

Not everyone is comfortable with investing. Some people prefer to save rather than invest because they value security, easy access to their money, or have a lower tolerance for risk.

Fear of Losing Money

One of the biggest reasons people avoid investing is the fear of loss. The stock market and other investments can be unpredictable, and not everyone is willing to take the chance of seeing their money decrease in value.

For example, if someone invested in stocks just before a market crash, they might have lost a significant amount of money. Even if markets tend to recover over time, the experience of losing money can leave a lasting impact and make them hesitant to invest again.

Security and Peace of Mind

Savings accounts offer a sense of stability. When money is in a bank account, it doesn’t fluctuate in value like investments do. This predictability appeals to many people, especially those who rely on their savings for emergencies or major upcoming expenses.

For example, if someone is saving for a house deposit, they wouldn’t want to risk investing that money, as the value could drop right when they need it. Keeping it in a savings account guarantees that it will be there when the time comes.

Easy Access to Money

Investments are not as liquid as savings. Withdrawing money from an investment account can take time, and selling investments during a market downturn could mean taking a loss.

Some people prefer knowing that they can access their savings immediately if needed. For example, if an unexpected expense like a car repair or medical bill comes up, they don’t have to worry about market conditions affecting their ability to pay.

Risk Tolerance and Personality

Everyone has a different level of comfort with risk. Some people are naturally more cautious with their money and prefer a steady, guaranteed return—even if it’s small. Others are more willing to take risks in the hope of earning higher rewards.

For example, someone who dislikes uncertainty might prefer to see a steady balance in their savings account rather than watching investments go up and down. Meanwhile, someone with a long-term mindset may not be bothered short-term market fluctuations.

Lack of Knowledge or Experience

Investing can seem complex and intimidating, especially for those who have never done it before. Some people worry about making the wrong choices, losing money, or not understanding how investments work.

Without financial knowledge or guidance, they may choose to stick with what feels familiar—keeping their money in savings. However, learning about basic investing principles can help people feel more confident in making informed decisions.

50/30/20 Rule

Finding the right balance between saving and investing depends on your financial goals, risk tolerance, and personal circumstances. While there’s no universal formula, a structured approach can help you decide how much to allocate to each.

The 50/30/20 Rule

A common guideline is the 50/30/20 rule, which suggests:

• 50% of income for necessities (housing, bills, groceries, transportation)
• 30% for wants (entertainment, travel, hobbies)
• 20% for saving and investing

Within that 20%, you should divide your money based on your financial priorities.

How to Split Savings and Investments

A good approach is to save first, invest later. Before putting money into investments, you need a financial safety net. Here’s how to decide the split:

1. Build an Emergency Fund First – You should have three to six months’ worth of essential expenses in a savings account. This ensures you have quick access to cash for unexpected events like job loss, medical bills, or car repairs.
2. Save for Short-Term Goals – If you plan to buy a car, go on holiday, or make a big purchase within the next few years, keep this money in savings where it’s safe.
3. Invest for Long-Term Growth – Once your emergency fund is in place and short-term goals are covered, start investing. Long-term goals like retirement, buying a home, or growing wealth benefit from investing since your money has time to grow.

A Practical Example

Let’s say you earn £3,000 per month after tax. Using the 50/30/20 rule, you’d set aside £600 (20%) for saving and investing.

• If you don’t have an emergency fund, focus all £600 on savings until you reach a comfortable buffer.
• If you already have an emergency fund, you might split it: £200 into savings for short-term goals and £400 into investments for long-term growth.

Adjusting Based on Your Needs

The 50/30/20 rule is flexible. If you have a higher income, you might be able to save and invest more. If you have debts to pay off, you may need to reduce investing temporarily.

Some people prefer a 70/20/10 approach if they have high living costs, while others aiming for early retirement might put 30-40% or more into investments.

A Healthy Mix

A strong financial plan includes both saving and investing. While saving provides financial security, investing helps your money grow over time. Striking the right balance between the two ensures that you’re prepared for both short-term needs and long-term goals.

Why You Need Both Saving and Investing

1. Saving for Security
Savings act as a financial cushion. When unexpected expenses arise—such as car repairs, medical bills, or job loss—you need quick access to cash. Having an emergency fund means you don’t have to rely on credit cards or loans in tough times.

2. Investing for Growth
While savings are safe, they don’t grow much due to low interest rates. Investing allows your money to work for you generating returns over time. This is essential for goals like retirement, buying a home, or building long-term wealth.

How to Find the Right Balance

1. Start with an Emergency Fund – Save at least three to six months’ worth of essential expenses in an easy-to-access account before focusing on investments.
2. Save for Short-Term Goals – If you’re planning a holiday, wedding, or home renovation in the next few years, keep this money in savings where it’s safe from market fluctuations.
3. Invest for Long-Term Growth – Once your short-term needs are covered, put extra funds into investments like stocks, bonds, or real estate to build wealth over time.

Example: A Balanced Approach

Let’s say you have £500 per month available after paying for essentials. Here’s how you might split it:

• £200 into savings (emergency fund or short-term goals)
• £300 into investments (stocks, pensions, or other long-term assets)

This balance provides both financial security and future growth.