Savers currently have a wide range of inflation-beating savings accounts to choose from, but with interest rates expected to fall in coming months, it’s worth considering alternative options too.
If you’re looking for ways to prevent steep living costs from eroding the value of your savings over time, can afford to tie your money up for at least five years, and are comfortable accepting a level of risk, you may want to consider investing, as well as holding cash savings.
Here, we explain the differences between saving and investing, to help you decide which is right for you, or whether you should consider both.
What are the pros and cons of savings accounts?
Saving often feels like the responsible thing to do with your money. It keeps it in a safe place where you usually can access it at any time, and where it will hopefully grow over time, as long as you regularly check you’re earning as much interest as possible.
Savings made easy with Raisin UK
Raisin UK provides a free savings platform where you can apply to open savings accounts with over 30 banks and building societies. Enjoy competitive interest rates from FSCS-protected banks.
You’ll have peace of mind that your money will be protected by the Financial Services Compensation Scheme (FSCS), which is the UK’s financial compensation service that steps in when financial institutions fail and are unable to pay customers’ claims. However, bear in mind that you’ll only be covered for £85,000 of savings held with a single institution, so if you have two accounts with the same bank, or accounts with two different banks that are owned by the same institution which together hold more than £85,000, you won’t get the full amount back. Learn more in our guide Are my savings safe?
Experts usually recommend keeping the equivalent of around three to six months of savings readily available in case of emergencies. Find out more in our article How to build an emergency cash buffer.
When living costs are high, savings rates often don’t keep up with inflation which can eat away at your cash. At the moment however, the base rate is currently at 4.75%, which is considerably higher than inflation at 2.3%, so plenty of savings accounts are currently offering inflation-busting interest rates.
However, if your savings account isn’t paying a high rate, you could still be losing money.
For example, let’s imagine inflation averages 2% over the next ten years. That means something that costs you £1,000 today would cost you around £1,180 in ten years time.
But if you put £1,000 in a savings account with a 0.5% interest rate today, you’ll only earn £50 interest over the same period. So even though you’ve technically made money, its purchasing power will be much lower in a decade’s time. You will have effectively lost £130, not in the sense of literally losing it from your account, but from its value going down compared to everything else. That’s why it’s really important to hunt out the best possible savings returns, for example by comparing rates at savings website SavingsChampion.co.uk or by using a savings marketplace such as Raisin UK.
You can read more about the effects of both inflation and interest rates on your savings in our articles What does inflation mean for my money? and Interest rates rise: what it means for you, and about where to find the best rates in our guide Where can I find the best savings rates?
What are the pros and cons of investing in stocks and shares?
When you invest in stocks and shares, there is the potential for higher rewards than you can get from a savings account over the long term, but there’s also a much higher level of risk involved.
When you buy shares, you’re essentially buying a small stake in a company, which makes you a shareholder in the business. If the company performs well, the price of its shares will go up. So, in theory, if you buy a share in a company that goes on to perform very well, you could sell your share for a considerable profit.
Of course, the opposite is also true. If the company doesn’t do so well then its share prices could drop, which means that you could end up having to sell for less than you put in to begin with.
Share prices aren’t only tied to company performance either – they can be affected by interest rates, borrowing costs, political instability, the wider economy and other events (the Covid-19 pandemic notoriously sent markets into freefall when lockdown measures were first announced). Share prices can even be swayed by how well the company is predicted to perform, rather than its performance at the time. In other words, investing in shares can be very unpredictable and isn’t for the faint-hearted. Read more about investing in our article Investing – the basics.
Of course, there are steps you can take to reduce the risks involved, for example by ensuring you don’t put all your eggs in one basket. Funds can be a good way to get started with investing, as your money will be pooled together with other people and invested across a wide range of different shares and possibly other assets. This means that if one company or asset underperforms, hopefully gains made by others will help offset some of these losses.
Drip-feeding your money into funds or shares gradually, perhaps by investing £50 or £100 a month as opposed to a lump sum, can also help reduce risk as you’ll end up buying more shares when prices are low, and fewer when they are higher, which can help smooth out market volatility.
Some shares might also offer income in the form of dividends, meaning that the business will pay the shareholders a regular cut of its earnings. Businesses that offer dividends often appeal to investors seeking to boost their retirement income.
Savings made easy with Raisin UK
Raisin UK provides a free savings platform where you can apply to open savings accounts with over 30 banks and building societies. Enjoy competitive interest rates from FSCS-protected banks.
Is buying shares risky?
The short answer is yes – while investing gives you the potential for higher rewards than savings accounts, it can also result in significant losses. Although some investments are safer than others, gains are never guaranteed. You shouldn’t put your money into anything that you don’t completely understand, and should strongly consider seeking financial advice first if you aren’t sure which investments are right for you.
The other main downside of investing compared to savings accounts is that your money is not as readily accessible when it’s tied up in shares. You’ll need to commit to selling your shares to get your money out, and even this is not an immediate process. It could take a few days for the funds to become available to you after selling.
If you’re saving in anticipation of an upcoming expense in the next couple of years then shares are probably not the way to go. In fact, most advisors will tell you that your money should stay in a share-based investment for at least five to ten years. Of course, there is nothing stopping you from splitting your money between a savings account to cover short-term and immediate expenses and shares for longer-term financial objectives, such as saving for your retirement or to fund a property purchase. If you’re saving into a pension, you will already be an investor – find out more in our guide Where is my pension invested?
Ultimately, there is no one-size-fits-all solution when it comes to investing. You will have to consider your own financial goals and attitude to risk when deciding whether to invest and how to go about it. Read more in our article Is investing right for you?
You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide on How to find the right financial advisor for you.
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