Updated: Nov 14
Many people confuse saving with investing or prioritise one after the other. Understanding how they differ will help you gain clarity on how you plan your finances. The decision on which to prioritise depends on your individual preferences, your financial goals, when you want to achieve these goals and your risk tolerance.
The fact is that having savings will help keep your debt ratio down and protect your money now (short term) while having investments will help you achieve goals in the future (longterm) and also provide an additional stream of income. Therefore, having both savings and investment is essential to financial success. But there is more to it than just this. So, let's dive into the difference between saving and investing.
If you are confused or overwhelmed about saving or investing, and you are not sure which to prioritise, I suggest you start with understanding the difference between saving and investing. This will help you make a good decision as I have uncovered it in this blog post. So, keep on reading.
Saving money: Ideas for saving money
You can save for different things. What you save for is a personal choice. When thinking about what to save for, think about the future things you intend to use the money for. You can save money for the following:
Anniversary or special celebration
Purchasing a car
For your children
Buying household equipment such as Sofa, fridge, new computer
What is investing?
Investing doubles your money, and you get to benefit from compound interest. Investing allows you to earn back in multiples of what you spent on a business or an investment scheme, which could sometimes be twice, thrice, or four times the amount you spent.
Because investment is long-term, most people invest towards their old age, pension and retirement, as well as for their kid's education. Nowadays, people invest so that they can live off their investment before retirement. For instance, the "FIRE Movement" helps with saving 50-75% of your income before retirement."
Rather than wait until retirement, they get returns on their investment early on. An example of this is returns from bonds and property investment, whether you are collecting rent every month or flipping houses or setting up a business.
Best ways to save money
Most people put their savings into a savings account held by a bank or building society. Some are into making contributions on a weekly or monthly basis, known as “Thrift,” managed by a group of 5-20 people where each member takes turns to collect money contributed in a savings pot.
Some people still keep money under their beds or in a safe in their homes. Although you might prefer these old methods, it is often prone to theft and fire disaster.
Recently, most banks have lowered their saving rates due to the pandemic. Here are a few popular options to keep your savings:
Instant savings account: Allows you to save as much money as you can and withdraw whenever you want. With this, you will earn very little interest on your savings over time.
Reward-based current account: If you bank with Santander and other high street banks, you will know that they offer cashback and discount rewards. To qualify for this, you must have several direct debits in place each month, and in turn, you will be rewarded with cashback and discounts as you shop at your favourite stores. Some accounts come with a monthly fee, and a minimum amount of income-based salary deposited into that account each month.
High-interest savings account: If you fix your money for a few years, you can get some excellent rates on your savings. High-interest rate savings account do have caveats such as only being able to deposit a one-time lump sum or being restricted to how much you can have every month. Be clear about what their conditions are if this is something you can commit to.
Cash ISA is an excellent place to keep your Emergency Fund. Although you will not get high interest on your cash ISA, you will get incredible tax relief, and your money will be accessible when you need it. Find out more about CASH ISA's here
Best ways to invest money
When deciding what to invest in, think about assets and income streams that will earn you money. Although buying your house is a good investment, it is not putting money in your pocket until you pay off that mortgage. This is more of a liability than it is an asset (Read "Rich Dad, Poor Dad" by Robert Kiyosaki and Sharon Lechter to find out more).
There are lots of ways to invest your money, here are the popular ones:
Stock Market: One thing to keep in mind is that although the stock market has proven to be a suitable type of investment, it is volatile (unpredictable), and you have to be in it for the long run! An excellent place to start with investing in the stock market is opening a Stocks and Shares ISA to benefit from tax relief. Find out how ISA's work here.
Bonds can guarantee you capital, but with inflation going up and down, the value of your capital could be worthless over some time. Bonds tend to be preferred over saving accounts as they have a good reputation for paying higher interest rates.
Crowdfunding: Startup businesses and charities use crowdfunding to raise money from the general public with the promise of a return on investment. There are different types of crowdfunding; loan-based (earn interest on your capital), equity-based (you earn a share of the company), donation, and reward-based (the company may give a thank you reward). Crowdfunding can be risky, so do your research about the company and understand their strategy for growth. See websites such as Crowdfunder and gofundme.
Peer to peer borrowing: Its similar to crowdfunding, but more focused on individuals lending to each other. Peer to peer websites will match you with a suitable peer who wants to borrow money or someone who wants to lend money with a return of investment. The risks with peer to peer borrowing is the same as all investments. There are no guarantees, so use a reputable company for matching and have signed contracts in place. Popular peer to peer lending websites includes Zopa, Funding Circle, and Ratesetter.
Property investing is highly prevalent in the UK. There are different types of property investing. The two popular ways are rental properties and reselling the property for a higher selling price than purchased. Although you need some capital for property investing nowadays, there are ways to get started with little to invest.
Business: Starting a business is a great way to invest. Most people have a set of skills or products they can sell or provide and make money from. Starting a business is long term and comes with risks. Most businesses fail within the first year; therefore, proper planning, funding and dedication can turn a service or product into profit.
Cryptocurrencies: You've heard of Bitcoins, Ethereum, Litecoins. These are all new types of digital currencies. A lot of people made money from bitcoin when it was first launched. Now that it's expensive, more people are moving to other types of Cryptocurrencies, and new currencies are invented daily. As Cryptocurrencies are still pretty new in the investment world, the risks remain. Cryptocurrencies might be a good investment, but this is going to be a personal choice as the risk of losing money still prevails.
Commodities: If you have read 'The Richest Man In Babylon,' you know that gold, silver, and oils were the investment of choice back in the days. However, they still present as the right choice for investing, especially if you want to diversify your income. The popular way to invest in gold and silver is in the form of coins.
As life goes on, there will be new ways of investing, so keep your eye out. Do your research and never invest more than you are willing to lose.
Factors affecting savings and investments
Understanding the factors that contribute to the success of your savings and investments will help you to make informed decisions about your money and help you not to panic. Here is a list of activities that can impact your savings and investments that you should keep an eye on:
The level of risk you are willing to take.
Savings vs Investing: The Difference
Savings are more accessible than investments. This is what we call liquid cash. It's readily available when you need it. Hence, your emergency fund should never be tied into an investment.
Having tons of money in a savings account will not make you rich. You are basically putting your money away till when you need it. Because you have easy access to it, banks will not offer high interest on your savings.
However, you can get high-interest savings account to get your savings to work harder for you. The approach is that you have to lock down your money for a few years, and sometimes you can only pay a lump sum into it. The option to deposit money regularly is not possible—for instance, £5k for 3 years with 5% interest.
Investments have more risk than saving.
Investing is a long term.
Investments require diversification. It's important to diversify your investment. This means that you need to have more than one type of investment as they will all do well at different times. When one is performing poorly, then you have another that is performing well. Over a long period, your losses will become wins!
Save or Invest? vs Save and Invest
Well, You need to have both; savings and investments. They are two different things, and they serve two different purposes. So, plan to have both savings and investments. You need to save so that when an opportunity comes, you can invest at the right time. You need to invest so that your money can work twice as hard for you over time.
When to save or invest?
Well, ten years ago would have been a better time, but It's never too late; you can still start now. If you are in your teens, early 30s, mid-30s, or 50s, it doesn't matter. Start investing now. You can take a low risk/low yield investment when you are still young because you have time for it to grow. When you are older, you may have to consider taking on a riskier/high yield form of investing in getting your money to work harder within a short time.
To finish off
Now that you know the difference between saving and investing, consider having a plan to save/invest. Determine how much and how long for the investment. Start learning about your preferred choice for saving/investment and get started now.