Saving and investing are often confused and used as synonyms, but there are differences between them.
At a very basic level, saving is the act of putting money aside in a safe place, with little or no risk of loss and with the intention of using it at a later date. Savings are often put in bank accounts where you can earn some interest on your money. This is usually between 1 and 3% in the UK.
The benefits of keeping your money in cash in a savings account are that you can access it whenever you need it. There is little or no risk of losing it at all. So for the short term, it’s a good idea to always have some savings aside in cash. But you make little or no interest on this money, which in the long term is an issue because of something called inflation.
Inflation is the rate at which the prices for goods and services increase. The UK has an average inflation rate of about 2% per year. If you put your money in an instant access savings account with 1% interest p.a. you are effectively losing 1% a year on your savings due to inflation. So if you are thinking long-term, then cash is not king.
Investing involves buying assets such as property, stocks* and bonds**, with the intention of making a profit (more money) over time. Investing is different from saving because it involves greater risk. There is a chance that you will get back less than what you put in as the value of your investments will go up and down over time. However, if you want to build wealth for the long term – think years not months – then investing is likely, based on decades of historical performance, to be a better option. This is because with investing you’re able to make higher potential returns in exchange for the risk that you take.
It’s important to remember that different investments have offered different returns in the past and there is no guarantee that the return on your original investment will be higher than what you put in. But there is plenty of evidence that proves that investing can make you more money than putting your money into a savings account over the long term.
For example, the average yearly return of the MSCI World Index (the share index of the largest global companies in developed countries) in Pound Sterling from 1st January 1980 to 31st December 2019 has been 11.1%. This is far greater than the 1 or 2% interest rate you would get in the UK for an average savings account.
*Stock is part ownership of a company.
**Bonds are loans made to companies or governments that are paid back with interest.
In summary, if you have a long-term goal with no set date for when you need the money, investing could be a better option for you. This is because you’re typically likely to make more money than just leaving it in an instant access cash account with a low-interest rate.
This article is provided for information only and does not constitute financial advice. If you require financial advice please approach an independent financial advisor authorised by the FCA. CIRCA5000 does not provide financial advice and is an execution only platform.
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