Saving and investing can be used to build your personal wealth in both the short-term and the long-term. However, it is important to know that they are very different from one another due to the amount of risk and return involved between the two.
You should also consider your short-term and long-term financial goals before deciding whether to save or invest. Longer-term investing is often the better option over longer-term saving due to the higher potential return, whilst short-term saving is safer than short-term investing.
By understanding the difference between saving and investing, you will be able to make an informed decision about which option is better suited for you.
Saving is putting money aside, bit by bit. You usually save up to pay for something specific, like a holiday, a deposit on a home, or to cover any emergencies that might crop up, like a broken boiler. Saving usually means putting your money into cash products, such as a savings account in a bank or building society.
This option is easier and generally the safer bet as you are less likely to lose any money as you go and there is no upfront cost or learning curve involved. They also show you the amount of interest you earn on your balance making it easier to track and plan your funds. Most bank products are considered very liquid meaning you can access your money as soon as you need it.
Despite the perks that come with saving, it does have some drawbacks including low returns. Because of this, your purchasing power over time may become lower due to inflation eating away at your money.
Investing is taking some of your money and trying to make it grow by buying things you think will increase in value. For example, you might invest in stocks, property, or shares in a fund.
The main perk to investing is the high amount of return you can make by researching and predicting market trends. By diversifying your investment portfolio, you are likely to beat inflation over time and increase your purchasing power.
However, the volatility of some investment products can result in you losing a substantial amount of money. Even with countless hours of research and planning, you are not guaranteed a positive return on your investment.
For your short-term goals, the general rule is to save, instead of invest, into cash deposits, like bank accounts. This is because of the safety involved in short term saving and the ease of accessing your funds in case of any financial emergency.
The stock market might go up or down in the short-term and if you invest for less than five years you could result in a loss which makes investing riskier and less attractive.
If you’re nearing 30, or older, you might want to consider investing in your retirement, although other investments can be suitable too. For longer-term goals, you may want to consider investing because it counteracts the effect of inflation on your funds.
The stock market tends to do better than cash over the long-term providing an opportunity for greater returns on any money invested over time. You can lower the level of risk you take when you invest by diversifying and spreading your money across different types of investments.
When investing it is a good idea to seek independent financial advice to ensure that you make the right decisions to meet your financial goals.
If you would like to know more about how we can help please contact JPM Insurance Advisers Ltd on 0121 270 4800.
Written by Matt Petrie