Deciding whether you should save or invest can be a tricky decision to make.
With plenty of other things happening in your life, you may not have had the chance to sit down and assess your options.
I’m going to explain some of the differences and similarities so that you can evaluate which method might suit you best right now.
What is the difference between saving and investing?
Technically, these two terms go hand in hand. That’s because in order to invest you have to save up a bit of cash.
Also, when we think of saving, it usually involves putting money into a bank account that pays us some interest. This is similar to the concept of investing. The only difference is that rather than financing companies through the stock market, we are lending our money to banks instead.
The good thing about saving and investing is that the process for doing either can be the same. In order to have money to do one of these things, the same principles apply:
- Spend less than you earn to create some surplus cash
- Use this extra money to go towards savings or investments
The only caveat is that this should only be done once all your immediate needs are taken care of. I’ll speak a little bit more about this below.
When should I save?
Really you should always be trying to do some sort of saving. Regardless of your goals and priorities, you shouldn’t be living month to month or pay check to pay check.
Money saved up can then go towards a number of different things:
- Creating an emergency fund
- Paying off debt
- Saving for a big ticket item or holiday
- Getting funds together for a house deposit
- Starting a business
- Saving towards retirement or adding to your pension
- Investing to create multi-generational wealth
There are tonnes of options. But it all starts with skimming money off your income to put aside.
If you never get into the habit of creating this surplus, it’s really going to hold you back and take you much longer to reach your financial goals.
When should I invest?
Once you’ve covered your immediate priorities and paid down debt, it’s a good idea to think about investing.
Investing isn’t a get rich quick scheme, it’s a long road involving time and consistency.
If you have money that you’re happy to leave to one side for at least a few years (ideally more) then investing can be a great option.
Especially when you consider that right now - interest rates are at very low levels, bonds are a bit of a joke, and premium bonds are just a lottery.
Using a stocks and shares ISA, you can build significant wealth for yourself over the long-term by investing wisely.
If you’re new to investing, you should check out our eBook and consider something like top index funds.
Is it better to save or invest?
This is completely down to your goals.
Traditional saving tends to be more short-term whereas investing is more suited to those with a long-term vision.
However, we are naturally short-sighted when it comes to money. It can be hard to plan ahead with our finances for the next few months, let alone the next few years.
Because of this, investing is sadly not a top priority for many people.
Saving is great, and creates good habits, but if you never do anything productive with that money, its value will get eaten away by inflation.
Once you’ve got your emergency fund and paid off any immediate debt, at least some should be going towards investing.
Investing gives you a much better chance of building wealth in the long run. If you just save and settle for tiny interest rates at the bank, you’re never really going to change your life.
How much money should I save before investing?
Again, this completely depends on your situation.
If you have debts that charge a high interest rate, there’s no point investing. Because it’s likely that the return from your investments will be lower than your debt interest. So it makes more sense to concentrate on getting rid of those costly debts.
It’s also worth having a decent emergency fund. This could be as little as £1,000 for some but covering at least a few months of living expenses is also advisable.
However, there’s always going to be things cropping up in life and it’s easy to find excuses not to invest. But the sooner you can start your investing journey the better.
Compound interest will work better if you give yourself more time to invest. So get into a good saving habit. Then once everything is in order, getting stuck into investing can be a great path to take.
It’s still worth remembering that there are still good and bad investments and you may get out less than you put in so do your research and be sensible.