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Why should you invest instead of just save?
Investing can be a great way to help you grow your money over time and achieve your financial goals. Investments offer the potential for higher returns compared to simply letting your money sit in a low-interest savings account that may not keep up with inflation.
However, investing does come with risks. There is the possibility of loss of capital, but strategic investment decisions can produce significant long-term rewards. If you’ve already got to grips with building your savings and retirement, investing could be a smart next step.
The key is to balance potential gains with the risks involved, so it’s important to conduct thorough research and seek guidance from a financial advisor if needed. This will help you decide the most suitable place to invest your money.
What investments can you choose from?
What investments can you choose from?
High-interest savings accounts – for top rates on your emergency fund
High-interest savings accounts offer market-leading interest rates compared to regular savings accounts, making it easier to build your savings and reach short-term goals. They’re generally low-risk investments, allowing you to safely park your money for emergencies or big purchases.
There are many types of savings accounts to choose from depending on your needs – including instant access accounts, notice accounts, cash ISAs and fixed-rate bonds.
Best for: those looking for better interest rates on their savings while keeping their money accessible in the short to medium term.
Stocks and shares ISAs – for long-term, tax-free growth
Stocks and shares ISAs enable you to invest money in the stock market. They are ideal for those who have long-term financial goals, such as saving for retirement or purchasing a home.
One of the main benefits of this type of investment account is that any returns generated within the ISA, whether from interest, dividends, or capital gains, are tax-free.
Best for: people who are looking to invest their savings in a variety of assets, such as stocks, bonds and funds, while minimising the impact of taxes on their investment returns.
Pensions – for tax-efficient retirement savings
Pensions are long-term savings designed to provide income during retirement. The main benefit of pensions is that they offer tax advantages, allowing contributions to grow tax-free or with tax relief, depending on the type of pension scheme.
Additionally, many employers offer pension contributions as part of their employee benefits package, effectively boosting retirement savings.
Best for: individuals who want to ensure financial security during retirement.
SIPPs – for greater flexibility in retirement planning
SIPPs, or self-invested personal pensions, are a type of pension scheme that offers individuals greater control and flexibility over their retirement savings. The main benefit of SIPPs is the ability to invest in a wide range of assets and investors can tailor their pension portfolios to their specific investment goals.
Best for: those who are comfortable making their own investment decisions and want to take a more hands-on approach to managing their retirement savings.
Share dealing – for hands-on investors seeking higher returns
Share dealing involves buying and selling shares of publicly traded companies on the stock market. The main benefit of share dealing is the potential for capital appreciation, as the value of shares can increase over time, allowing investors to profit from their investments.
Best for: those who are comfortable with taking on some level of risk in exchange for the potential for higher returns.
Peer-to-peer lending – for people looking to diversify their portfolio
Peer-to-peer (P2P) lending is another way of investing, but instead you lend money to other people and businesses through an online platform.
It connects lenders looking to earn higher returns with borrowers who need funds, cutting out traditional banks. Investors receive their money back with interest when the loan is repaid.
Best for: people looking to diversify a small portion of their portfolio with alternative investments and willing to take more risks.
What to consider before investing your money
The decision to invest your money shouldn't be taken lightly, and it's important to understand the risks involved before taking the plunge. Here, we look at the key factors you should consider.
Your risk tolerance
Understanding your risk tolerance involves assessing both your financial ability to withstand losses and how your mindset can handle market volatility. Factors such as financial goals and income stability all play a role in determining risk tolerance.
Your product knowledge
It's essential that you understand the products available for investment. This includes stocks, bonds, mutual funds and more. Having a strong grasp of these products allows you to make an informed decision based on their risk and market conditions.
Your timeframe
Your investment timeframe is how long you plan to hold your investments before needing the funds. It's an important factor in determining your investment strategy. Short-term investors may aim to profit from market fluctuations within months or a few years, often preferring assets like stocks or short-term bonds. Long-term investors focus on boosting money over decades, allowing them to experience market volatility but still potentially benefit from the compounding of returns.
Investment size
Investment size is the amount of capital you allocate to investment opportunities. It plays an important role in determining the level of risk and potential returns. Small investments may limit asset options, while larger investments offer greater flexibility and potential for growth.
Where to invest at every stage of your life
Under 40
Building an emergency fund
To build a strong financial foundation, it’s sensible having some money saved up for emergencies. A high-interest savings account can help grow your funds while keeping them easily accessible.
40-59
Investing for retirement
As you get older, it's important to secure your financial future. A self-invested pension plan (SIPP) lets you take control of your retirement pot by choosing where to invest it and how much risk to take.
Over 60
Growing your nest egg
In your later years, preserving and growing your nest egg becomes a priority. A stocks and shares ISA offers the potential for higher returns than cash savings, helping your money keep up with inflation.
Saving vs investing: what beginners should know
Saving and investing are both ways of trying to make your money work harder, but there are important differences.
Saving
When you save, you deposit your money with a bank or building society, and in return they pay you interest. For instance, a bank might agree to pay you 5% of everything you set aside each year. The amount of interest is generally agreed in advance and could be either fixed or variable.
If it’s fixed, you’ll know exactly what you’ll earn over the course of the year. Variable interest might change, for instance if the Bank of England changes its base rate. Your provider must tell you if it is putting rates up or down.
When you save, your capital is not at risk. You’ll get back all your original savings, plus any interest. However, it’s rare to find savings accounts that pay more than the rate of inflation.
This means that over time, the cost of goods will rise more quickly than your savings and your purchasing power will be eroded. So, you need to save more than expected to meet your financial goals.
Investing
There are lots of different types of investments:
Corporate bonds
Funds
UK government bonds (gilts)
When you invest, you’re buying assets and these could be anything from stocks in Google to office buildings. The hope is that your investments will increase in value over time, so that you make a profit when you sell.
You can also take a share of any profits the thing you’re investing in makes - known as dividends when it comes to stocks. Some investment strategies focus on this aspect, aiming to generate an income by buying shares in companies that pay dividends.
Of course, the things you buy could sometimes decrease rather than increase in value. If you sell after a stock has dropped in price, you could end up with less than you put in.
Diversification: the smart way to spread investment risk
Since investments can fluctuate in value, most investors choose not to buy single stocks in just one company or asset, but instead to diversify across a wide range of assets. This helps to protect your portfolio from volatility. There are plenty of companies that will do this for you, either by actively picking a range of investments, or by mimicking one of the financial indexes, such as the FTSE 100.
While investments can be risky, especially in the short term, well diversified strategies typically outperform savings rates over the long term, helping to protect your money from inflationary rises.
Understanding potential returns
Returns from investing can vary depending on your chosen investment, market conditions, and your individual investment strategy. Generally, investing in assets like stocks, bonds and real estate can provide potential returns ranging from modest to substantial - but this will be over a long-term period.
Remember, investing carries risks, and past performance is not indicative of future results. Therefore, you should carefully assess your risk tolerance and investment goals to make informed decisions about the expected returns.
If you would prefer a guaranteed return, then a savings account could be more suitable. Fixed-rate savings accounts offer a guaranteed interest rate so you'll know exactly how much you'll earn after the term. For example, if you deposited £5,000 into a one-year fixed-rate savings account offering 5% interest, you would earn £250 once the term ends.
Read more: How are investments taxed?
Pros and cons of investing
Pros
Cons
Take professional advice when you need it
If you would like to better understand how investing can help you meet your financial goals, it may be beneficial to get help from an independent financial adviser (IFA).
An IFA can advise you on all the financial products and investments that they think meet your needs.
For full details on how to find the right advisor for your circumstances, read our ‘Five steps to finding an IFA you can trust’ guide.
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