Whatever your long-term goals are, saving or investing your money as soon as you have the chance is the wise option for safeguarding your financial future.
Whether you run a business, are a full-time employed worker or a freelancer, learning what to do with the money you have left after your essential expenditures is integral to meeting your future financial goals.
The two most common ways for people to build their finances and personal wealth are saving and investing.
This article explains the advantages and disadvantages of both choices and the considerations you need to make before choosing whether to save or invest your money.
First Things First!
Before you even begin to consider which is the better choice for you, make sure that you have all your finances in order. If you have any outstanding debts to be paid immediately, you need to take care of those before considering either option.
Saving and investing are both excellent tools for financial security – but only if you are genuinely able to put money aside for either option, i.e. have the excess money after all your regular essential expenditures and debts.
What Are Savings?
Savings are the simple process of setting your cash aside in a safe and liquid bank account designed for accruing your money.
Ensuring you have access to your money when saving is an essential factor to bear in mind, as you never know when you may need some emergency funds.
There are several options for this purpose, including easy-access saving accounts, regular saving accounts and current accounts. However, it’s best to check the terms and conditions of your provider as some impose restrictions on the number of withdrawals you can make and whether you are required to make monthly deposits.
Why Should I Save My Money?
The main advantage of saving your money, in comparison to investing, is that it is the safer way to ensure the monetary amount you have now is what you will also have in the future, should you require it. Thus, you essentially have a pile of money that you can build and access whenever you need it. For example, suppose you were to lose your job or need money to clear a debt – no problem. You have enough money tucked away to help you through.
But savings aren’t there just for an emergency fund. If you already have a substantial amount saved – why stop?
Saving a regular amount each month can help you reach your long-term financial goals in a timely and structured way. For instance, if you are still starting out and your goal is to have £20,000 to your name in five years, you would need to put away £333 per month to reach that goal (without considering the interest rates on offer).
You can rely on the stability and security of a savings account to ensure that should you continue to put that sum away each month, you will ultimately reach your financial goal.
Why Should I Not Save My Money?
One of the key disadvantages to bear in mind is that whilst the monetary amount in your account may continue to increase, the actual value decreases as the years pass due to inflation.
Inflation is simply the rate at which prices are rising for both services and goods, and it ordinarily outstrips the interest rates paid on most saving and current accounts.
Whilst the rates aren’t necessarily felt by consumers on a month-by-month basis, the long-term impact can be substantial. The current UK inflation rate, as of June 2021, stands at 2.5%. Most traditional easy-access accounts pay around 0.5% in interest – which is nowhere close to meeting inflation.
Some traditional-fixed saving accounts paid over 2% not too long ago. However, the best you can get now is around 1.4%. To get this rate, you would also have to lock away your money for five years, which means you relinquish the option of accessing your funds for emergencies or general withdrawals. A few current accounts allow you to earn 2% on savings, but there are limitations on the amount you can save monthly or cumulatively.
Due to the low-interest rates, it may be argued that savings are a hugely reliable but ultimately underpowered way to reach your goals.
What Are Investments?
Investments are simply a way to grow some of your money by buying products (financial and non-financial) that may increase in value over time.
There are several opportunities available for investors looking to grow their money and build their financial portfolio, including stocks, properties, shares in a fund, bonds, forex, dividends and more.
Why Should I Invest My Money?
One of the key benefits of investing is that your money can grow far quicker than it ordinarily would if you stashed it away in a savings account.
Investments also have a far higher returns ceiling for potential returns, which means your financial goals could be a lot closer than you had previously envisaged. As a result, you could considerably build your portfolio with a successful strategy and surpass your goals.
Due to the number of options prospective investors have, they can pursue the financial service that best suits their needs in terms of desired return on investment. This is not possible with a savings account that limits you from putting money aside and waiting for it to accrue a minimal interest amount.
Along with choosing the right opportunity based on returns, investors can also spread the risk of their investments by utilising a diverse portfolio strategy to minimise reliance on any one asset or market. There are also safer options for the more risk-averse investor.
Wisely investing your money can open opportunities that don’t often come working a typical salaried full-time job with comparatively lower returns.
Why Should I Not Invest My Money?
Whilst investing has clear benefits to saving when it comes to maximising your returns, there is no question that it comes with far more significant risks.
While that are undoubtedly some safer bets in the vast array of investment options, and you can spread your risk, the market remains unpredictable even at the best of times, and you risk the potential of losing some or all of your investments.
This is amplified during times of crisis, such as the 2008 financial crash that caused significant disruption across many markets. Then, house prices – typically a secure investment – came tumbling down amongst other ‘safe’ markets, much to the turmoil of even more risk-averse and diversified investors.
The bottom line is that there is always the possibility of losing your money on whatever investment you decide to pursue.
Stock market prices can fluctuate depending on several uncontrollable factors; therefore, your capital is always at risk to some extent.
If you can afford to take on the risk and understand the markets, investing may be the right option for you. But if you are entirely risk-averse and the idea of losing any of your money doesn’t sit well with you, then choose to save.
How to Decide Whether to Save or Invest?
As mentioned previously, you should always ensure your financial foundations are in place before you decide. This includes ensuring you have no outstanding debts and can afford to put some money aside for either purpose.
In order to determine whether you should save, or enter the investment world, the following questions may help:
- Do you currently have any savings for emergencies?
If you don’t have any savings and your emergency fund stands at nil, investing may be too soon for you. Start saving and once you have built up enough of a buffer to cover anywhere between 4-8 months of regular expenses, consider investing.
- Can you afford to put money aside?
Investing can be a long-term process that doesn’t necessarily lead to profits within a short timeframe, especially for lower-risk portfolios. Therefore, you must ensure you can afford not to take money out for a significant period to allow your investment time to grow. With easy-access savings accounts, access to money is not as big of a factor.
- Are you ready for investing & willing to take on the risk?
While investing may sound the more appealing option for you, you must understand the market’s basics. Having no to minimal knowledge of the investment market is a recipe for disaster. But, additionally, you must also be prepared to take on the risks that come with investing.
If you replied “no” to any of the above questions, it should be time to prioritise saving over investing until you’ve established a solid financial foundation and have a safety net to fall back on.
At Cue Talent Advisory, we handle all affairs business, management & lifestyle for individuals, businesses, and overseas clients. To find out more about how we can help you, contact us to set up a chat. Get in touch via our contact form, email us directly or call us on 0203 815 8005.
