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Not everyone is knowledgeable about what to do with their money. It may sound simple either save or invest but how do you know what options suits you best and which one will work out better in the long term? Understanding the benefits and differences between investing and saving your money will help you to make an informed decision about where to place your pounds.
Let’s start with savings. The concept itself is fairly straightforward but what are the pros and cons of opting for a savings account instead of travelling down the road to investment?
When you open a savings account you will receive an agreed rate of interest on your funds, therefore one of the main benefits of saving your money is the ability to accurately forecast how much profit you will make in a given time period. Your savings are guaranteed to grow so if clarity and predictability is what you are seeking, saving may be the best option to choose. Remember to account for inflation when forecasting if you receive an annual interest rate of 5% and inflation is resting at 4%, your savings are growing at 1% annually.
Saving your money is a means of protecting it over time and the prospect of maintaining a secure and steady account balance is more important for some savers that gaining the potentially higher return associated with investment.
As with most things in life it pays to shop around when choosing your savings account. Banks and other financial institutions offer several options all with varying interest rates, so if opting to save make sure you’re gaining as much interest as possible.
Investing your money is connected more to growth and maximising return on investment. Wherever you choose to invest your money there is generally greater risk involved when compared to the savings options available. A calculated risk may well be worth taking however as investors have an increased possibility of seeing greater growth as well as more protection against the inevitability of inflation. Where savings will earn you a fixed rate of interest, investments offer the potential to grow and potentially generate a higher return.
The decision about where to invest your money depends on the usual suspects of liquidity, yield and risk. Liquidity may be a deciding factor when flipping the savings and investment coin. Savings are generally much easier to liquidate than investments so depending on future hopes and plans this may well be a deciding factor. Investing your money is usually a longer term option, so if there’s a chance you may need to access your capital in the near future then saving is more likely to be the better option.
You may find it’s not a simple case of choosing one over the other as it may be a combination of savings and investment that works best for you and creates a brighter future for your finances.
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