What’s the difference between investing vs saving?
When planning for retirement, the question of investing vs saving usually comes up. Both are valid and proven methods for building a nest egg and have their own advantages and disadvantages. But which is the best method for me?
This is ultimately a personal question, and the answer will vary between different individuals. So let’s take a closer look at the differences between these strategies.
Investing vs Saving: What’s the difference?
As a quick reminder, saving is the act of putting money aside, usually in a bank account, to fund future expenses. By comparison, investing is where money is put to work inside some form of financial instrument, like stocks and shares, to try and build wealth.
It seems simple enough. So, why is there a debate over which is better? Surely building wealth is the better strategy? Well, not necessarily. Let’s explore investing vs saving.
Advantages and disadvantages of saving
With interest rates being near 0% over the last decade, even after the recent hikes by central banks, the returns generated by saving money have been pretty abysmal. In fact, most savings accounts have failed to outperform inflation, causing the destruction of wealth in terms of spending power.
However, it comes with a massive advantage that makes it more attractive to some individuals – stability & access. Savings in the bank don’t suffer from fluctuations in asset prices, ensuring that no money will be lost.
What’s more, deposits can be accessed at any time, anywhere in the world, thanks to innovations from fintech stocks. And even in extreme cases when a bank declares bankruptcy, savings are insured by financial regulators for up to £85,000.
Advantages and disadvantages of investing
Investing money, on the other hand, offers the potential for a far higher return. On average, the UK stock market delivers an annual return of around 8%. This figure is closer to 10% if an investor decides to put their capital to work in the United States.
That’s considerably more than what any savings account in the world can offer. And over the long-term can lead to enormous wealth creation. And more importantly, it enables a nest egg to stay ahead of the inflation curve, at least under normal circumstances. The problem is that these returns are never guaranteed.
As with any financial instrument, like bonds, commodities, or stocks, there is an element of risk to consider. 2022 has perfectly demonstrated how volatile the stock market can be, and portfolios can see years’ worth of growth quickly unravel during a correction or crash.
This means that if poor investment decisions are made, it’s likely that wealth will be quickly destroyed. And an investor can end up with far less than what they started with.
But assuming an investor doesn’t fall into this pitfall, there is still a limitation in regard to asset liquidity. Through digital investment platforms, stocks and other financial instruments can be bought and sold almost instantly.
But if I want to withdraw money from my investment account, they must wait a two-day clearing time so that the trade settlement process can be completed.
I should note this only applies to withdrawals. Most brokers will enable investors to instantly reinvest any cash gained from a stock sale.
How much should I be saving and investing?
The decision surrounding the balance of how much money to put towards investing vs saving is, once again, down to personal circumstances.
But as a general rule of thumb, the financial advice given by professionals is to put aside 10-20% of my monthly income for either of these strategies. For example, Matt Rogers, the director of financial planning at Money Advisor, recommends that 15% of pre-tax income should go towards my investment portfolio.
It sounds simple enough, but that may not be possible for everyone, especially those living paycheque to paycheque.
In my opinion, and one that my colleagues at The Money Cog share, is that only money not needed for at least the next five years should be invested. I put the rest put into savings. The logic behind this is to ensure I’m never in a position where I’m forced to sell my stocks at the worst possible time to meet living expenses.
Investing is a long-term process. And pulling capital out early usually ends up triggering losses. That’s why having a solid cash buffer in a savings account is critical, I feel.
Which is the better option?
No matter what is my current financial situation, having a safety net of savings is one of the best financial decisions. At least, that’s what I think. By having an emergency fund, a sudden unexpected expense won’t cause financial instability.
But having too much in cash savings can also be a bad financial decision. After all, excess capital should be put to work through instruments like stocks to try and build a bigger nest egg for a comfortable retirement.
So, when making a decision between investing vs saving, I like to ask myself two questions:
- Do I have an emergency cash fund? According to financial experts, always build short-term cash savings and then put any surplus towards investments.
- Can I live without some money for at least five years? With an emergency fund in place, I should be able to put my money into a long-term investment that I will not need to use for a long time.
The main rule of thumb is to have access to cash when needed.
Investing vs savings: What to do now in 2022?
This is the million-dollar question of the year. With the stock market being exceptionally volatile, it can go to the lowest lows and the highest high in no time. A single event can make or break the stock market in unpredictable ways.
But despite all this volatility and fearful sentiment, I can’t help but notice several high-quality businesses trading at double-digit discounts.
That, to me, looks like there are multiple lucrative investment opportunities available for those able to stomach the short-term risk. And since time in the market is more important than timing the market, I feel the best time to start investing is always right now.
Top 3 Stocks For Trying To Beat Rising Inflation
The stock market is reeling from the growing level of inflation. And with so many fantastic businesses trading at massive discounts, now could be the perfect time for savvy investors to snatch up some potential bargains.
Deciding which stocks to add to a shopping list during times like these can be daunting for new and seasoned investors.
That’s why our hotshot analysts at The Money Cog’s flagship Premium research service have just unveiled what they think could be the three best buys for investors right now.
What’s more, we’re sharing all three in a special FREE investing report available today!
Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.