The difference between saving and investing
If you have money, you can keep it to one side until you need it. Or you can buy something with it. And in the financial world, that’s the essential difference between saving and investing.
Opening a savings account is a way of putting your money to one side until you need it. Investing is about using your money with the aim of benefiting from the future potential of something you buy.
The crucial difference between saving and investing is the level of uncertainty about the money you'll get back. When saving you'll always get back what you put in, when investing you'll see your money rise and fall over time and it's possible you may get back less. So why would anyone consider the uncertainty of investing over the certainty of saving?
When you keep your money in savings, you won't see the value go down. But if you keep money in savings for a long period of time, rising prices (inflation) means your money may not have the same buying power when you come to spend it as it did when you put it away. In the table below you can compare the increase in the price of tea bags to saving the equivalent amount over 20 years.
|Tea bags (per 250g)||£1.50||£1.80||£1.95|
*Applying the annual average interest rates on UK savings accounts (Swanlowpark, January 2020)
Some types of savings accounts have restrictions when you can withdraw your money. For instance, with the Santander 2 Year Fixed Rate Cash ISA you can't make partial withdrawals and there is a penalty for closing your account within the 2 years.
Investing isn't the same as putting your money in savings where your balance can't go down. When investing, you tie your money to the performance of a range of assets, such as stocks and shares, with the hope you'll make more money than you put in. As the value of the assets rises and falls, so does the value of your investment.
So why would anyone take this risk with their money? Putting money into savings does mean you know it will be there when you need it, but it's unlikely to grow significantly and can be eroded by rising retail prices. Investing has the potential to grow more over the long-term, and historically in the UK shares have done better than cash or even commercial property values (see chart below). Remember that past performance is not a reliable indicator of future performance.
Investing should be used as a medium to long-term financial strategy, but your money is not necessarily locked away. Apart from fixed-term investments, disinvesting your money usually takes around five days, and has no penalty when withdrawing. The amount you'll get back will depend on the current value of the assets within your investment, which may have risen or fallen since you started.
Explaining the chart
The return from cash assuming it can receive the same interest rate as the Bank of England’s Base Rate with interest reinvested.
UK government bonds
The growth in value of fixed rate bonds issue by the UK led Government, with income reinvested, as reported by the FTSE Actuaries UK Gilt Index for bonds with duration 5 to 15 years.
The growth in value of UK shares, with income reinvested, as reported by the FTSE All-Share Index.
UK commercial property
The growth in value of shares in UK commercial property, with income reinvested, as reported by the MSCI UK All property index.
Making the choice
If you've paid off any debts where the interest rate is higher than savings rates, then having some money in savings is widely accepted to be a good thing. But if you’ve already got a good savings pot, check the interest you're earning on it. How does that compare to inflation? (Inflation rates are published every month and are easy to find online.)
Ask yourself, am I missing an opportunity? Could I be making my money work harder by moving some of it into investments?
Learn more about investing