Mastering the financial markets can be difficult, and with many different options of what to do with your money, it can be hard to know what is the best for you. Especially when you consider the best returns or the level of risk you want to expose yourself to. So, which is the best option for you, should you save or invest your money?
What Is Saving?
Saving involves putting money aside for a goal, whether it is for a house deposit, holiday or a rainy day. Usually, saving will involve using a savings bank account, building society or a Cash ISA, where you can benefit from tax-free interest. Saving may also come in the form of saving schemes or even a piggy bank at home.
Depending on your financial situation, you can often get a better deal (more interest) if you keep your money in a savings account for a few years. Make sure to shop around to find the best interest offers.
What Is Investing?
Investing requires using a sum of your money as a share or percentage and putting it into a product or service in the hope that it will increase in value. If it grows, your stock may increase, and you can withdraw your money at a higher value than what you put in. If the product or service loses value, then you will lose money.
Investing can be complicated and will often have tax implications. If you plan to invest a large sum of money, it can help to seek the advice of a financial advisor.
Why Should You Save Your Money?
Saving money will help you to pay for things in the future. Savings can be particularly helpful for unexpected events such as a boiler or car breakdown. As well as this, having a saving pot for costly expenses such as a house deposit or holiday can make it much easier to achieve your goals.
For most people, it is wise to have a fund of three months’ worth of living expenses in savings. This can help you in unexpected events such as losing your job. With this financial security, you can have peace of mind. (Also see emergency loans on Lending Expert).
As you may need to access this money quickly in an emergency, the best place for your emergency pot is in an easy-access savings account, where you can withdraw from the account with ease (such as through your banking app).
Once you have an emergency pot ready, you should then try to save at least 10% of your income for your saving goals. This could be a significant expense in the future such as your wedding, house deposit or holiday.
If you feel comfortable with your financial situation and have appropriate savings in place for your lifestyle, then you may consider using investments.
You should only save once you have paid off any debts of overdrafts. Always focus on your priorities before concentrating on building your savings. However, in some cases, the low interest of a loan and a high-interest savings account may mean it is more economical to save and then pay off your debt in one lump sum. Do your sums and work out the best route. However, for most, it provides greater peace of mind to get rid of debts.
Should You Save Or Invest?
To determine whether investing is right for you, it depends on a number of factors including;
Your goals and timeframe
If you have short-term goals, then saving schemes are usually preferable as the stock market is volatile in the short term, which could lead you to make a loss. Investing for medium and long-term goals may be worthwhile as long as you are happy with the risk.
Bear in mind that if interest rates are low and inflation rates increase, you could lose money if you save for the medium and long-term.
Your aversion to risk
Savings accounts are usually protected by the Financial Services Compensation Scheme (FSCS). Under the FSCS, the first £85,000 of your savings are protected. Any savings over this will not be protected, so it may be worth investing the money over this threshold.
Remember that investments can go up and down, you may lose all of your investment in a bad deal of market crash. The best way to reduce the risk in investments is through diversification.
Your knowledge of financial markets
Investing requires a level of understanding of financial markets, including the best-looking investment opportunities and the different types of investing. You can invest in stocks, bonds and cash equivalents as well as alternative finance methods such as peer-to-peer lending and property investing.
If you are not sure about your financial situation or the best option for you, seek help from an independent financial advisor before investing.