Lesson 2 of 7
When you invest, your capital is at risk.
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You have set some money aside. The question now is whether it should stay in a savings account or start working harder as part of an investment.
Whether you choose to save or invest is not a reflection of your personality. It is a decision about where to put your money first depending on your goals and time horizon. Getting this wrong can increase the risk of losing money or missing out on potential growth.
Put money you need to access soon into investments and you may be forced to sell at a loss if life intervenes. Leave money you will not touch for years sitting in cash and it can lose purchasing power over time if inflation is higher than the interest earned.
The same pound may behave differently depending on when you need it back.
Important: This article is for general information only, not personal financial advice. What is right for you will depends on your circumstances. The value of investments can fall as well as rise.
Money set aside without a clear job tends to drift. Some people leave everything in a current account, then discover years later that prices have risen faster than their balance. Others move money into investments before they have any buffer, then face the worst possible timing when something changes and they need cash fast.
The potential costs of confusing saving and investing runs both ways. Invest too early and you expose money you cannot afford to lose. Save for too long and you risk the slow squeeze of inflation on money that could have had a better chance of growing over time. This decision sits underneath almost every later financial choice you will make.
Saving typically means holding money in cash-based accounts where the value is stable and funds are accessible (though this depends on account terms: instant access, notice, fixed term etc). The aim is availability and protection from short-term shocks, not taking on price swings.
Cash savings are typically more stable in pound terms (though interest rates vary by account type, and inflation can reduce buying power). The FSCS currently protects funds of up to £120,000 held in UK-authorised banks and building societies.
Investing means putting money to work in assets whose value can rise and fall, such as shares, funds and bonds. The trade-off is straightforward: you accept that the value moves, sometimes sharply, in exchange for the possibility of higher returns over the long term.
When you invest, your capital is at risk. You may get back less than you put in.
When debating saving vs investing, the key considerations are the same for both:
Time horizon: How soon do you need the money back?
Risk tolerance in practice: Could you hold your position if the value dropped, or would you be forced to sell?
Spending is the baseline that both saving and investing are built on. You cover your costs, then you save what you need soon (and for the unexpected), then you invest what you can leave alone.
Emergency savings come before investing for many people. An emergency fund is money you can reach for quickly when the unexpected happens. It should be kept where its value does not move in response to markets. As a rule of thumb, most people aim to build a fund that will cover several months of essential spending, though the right level depends on your personal circumstances.
Time horizon makes a difference. Money needed within the next five years – for example, for a holiday, a wedding or buying a house – is usually better suited to saving. Money earmarked for goals several years away is where investing may be considered. A short time horizon can make market movements harder to wait out.
Risk is the trade-off. Investing means accepting that prices can fall as well as rise. That is not a flaw in the system, but it does mean you need time and staying power so you are not forced to sell when prices are down.
Inflation works against cash. Saving can protect the amount you have, but over longer periods inflation can reduce what that money can buy. This is one reason people consider investing for long-term goals, while accepting that the outcomes are also uncertain.
Take the example of someone who has £5,000 set aside. They have a holiday planned in eight months and want a car repair fund to cover unexpected expenses. They also have longer-term goals 10 years away.
The holiday money stays in savings. This is needed soon and is intended to be readily available. The car repair fund stays in savings too. It is there for unexpected outlays, and the unexpected does not wait for markets to recover.
The portion earmarked for a goal 10 years away is different. It does not need to be available next month. It can tolerate movement. This is where investing may be considered, because time can increase the chance of recovering from a downturn. However, it is not guaranteed and you could still get back less than you invest, even over long periods. As shown in the graph below, annual returns for both cash and equity can vary considerably from year to year.
If you are trying to decide whether to save or invest, ask yourself the following:
Do you have an emergency buffer in place? This is money you can reach for when something goes wrong or for expenses you didn’t anticipate. For many households this comes before investing, depending on circumstances.
Is this money needed within the next few years? If yes, it may be more suitable to keep it in cash savings, because the value needs to be there when you need it, not dependent on what markets are doing.
Could you wait if your investment fell in value? If a drop would force you to sell or push you into acting quickly, it is not money for investing. Investing works best when you can leave it alone through ups and downs.
For most people the answer is a mix of both saving and investing. Save for what you need soon and for the unexpected. Invest what you can leave alone for the long term.
Important: This is educational information, not personal financial advice. What is right for you depends on your circumstances, and the value of investments can fall as well as rise.
Investing before an emergency buffer exists. If you have no savings to reach for and markets break, you may be forced to sell investments at exactly the wrong moment.
Treating a savings account as an investment. Saving is designed for stability and access. Expecting it to do the job of long-term growth can leave you holding too much cash for too long, while inflation reduces buying power.
Waiting for certainty before starting. There is no perfect moment to begin investing. Waiting can mean leaving long-term money in cash for years. A better question than “will markets fall” is whether you have time and resources to hold through a fall without needing to sell.
Saving protects money you need soon; investing can work for money you can leave alone.
You should build an emergency buffer before investing.
Time horizon, not preference, often decides which job each pound does best.
Investing means accepting value moves down as well as up.
For most people the answer is a mix of saving and investing, handled in the right order.
A common approach is to start by giving each pound a job. Money for emergencies and near-term spending is usually better suited to saving, where it is accessible and not exposed to market movements. Money you can leave untouched for years is where investing may be considered, because you have time to ride out ups and downs.
There is no one-size-fits-all rule. Many people use the idea of three to six months of essential spending as a starting point for emergency savings, then adjust this based on job stability, fixed costs and how quickly they could cut spending or replace income. The right amount will depend on your circumstances.
They may be “safer” in different ways. Saving can protect the amount you have in the short term, but it does not protect buying power from inflation over long periods. Investing can offer a chance of long-term growth, but the value can fall as well as rise and you may get back less than you invested.
Saving sets money aside so it is typically more stable and available when you need it. Investing puts money into assets whose value can rise and fall. Saving is typically used for short-term needs and emergencies. Investing is typically used for long-term goals where you can tolerate price movement and do not need to sell at short notice.
