What is the difference between saving and investing?
Spending money can come naturally, but it’s not always clear how to make our money work for us. In this article, we’re going to break down the difference between saving and investing and provide three practical tips for you to make the most of your hard-earned cash.
So, what’s the difference between saving and investing?
Saving
Much like squirrels saving up acorns in a safe place until they need them again, think of saving as putting money aside for short-term goals or emergencies.
It’s like having a stash of cash that you can access when it’s needed. This might be for a holiday, birthdays, or an emergency such as replacing a household item.
You usually keep your savings in a savings account, and while it doesn’t earn a lot of interest, it’s safe and readily available when you want to spend it.
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Investing
Different to saving, like a gardener planting an acorn with the intention of growing an oak tree, investing is about putting your money to work with the goal of earning a return over the long term.
Instead of keeping your money in a savings account, you put it into things like stocks, bonds, or property. Your money won’t be quite as easy to access if an emergency comes up, but these investments have the potential to make your money grow faster.
However, investing also comes with the risk of possibly losing some or all of the money you put it. A gardener must keep an eye on their plant to help it grow, but a bad spell of weather can come along that kills the plant and leaves the gardener without even the original acorn. As a rule of thumb, higher possible returns mean higher risk.
Three top tips
Set some goals
Start by setting some goals for your money. Maybe you want to save up for a new laptop or plan for a gap year adventure. Having specific goals gives you a reason to save and invest, making it more exciting because you can see your progress toward something awesome.
- Be realistic: Make sure your goal is realistic based on your income and current financial situation. Setting a goal that’s too ambitious can be discouraging, while a goal that’s too easy may not motivate you to save.
- Break down larger goals into smaller, manageable milestones: For example, if your goal is to save £1,000 for a holiday in a year, aim to save £83 per month. Smaller milestones make the goal seem less daunting and allow you to track your progress.
- Review your goals: Remember that adjusting your goals over time is perfectly fine as your financial circumstances change. The key is to consistently save and make adjustments when necessary to ensure you’re on track to achieve your financial aspirations.
Build a savings safety net
Before diving into investments, start by creating a savings account for emergencies. Having this safety net will protect you from unexpected expenses, such as replacing a broken laptop or a dental bill.
- Work out how much you should save for emergencies: As a rule of thumb, aim to save up the equivalent of what you spend over 3-6 months. This is the amount experts have found covers most emergencies.
- Create a separate savings account for the fund: Building an emergency fund takes time and discipline. To prevent the temptation of dipping into your emergency fund for non-emergencies, open a separate savings account specifically for this purpose. Choose an account with easy access to your funds.
- Top up the fund after using it: If you ever need to use your emergency fund for a genuine emergency, make it a priority to top the fund back up as soon as possible. Increase your monthly savings contributions until the fund is back at your goal level.
Start small and steady when investing
You don't need a lot of money to start investing. In fact, you can begin with as little as £10 or £20. This way, you can learn the ropes without risking too much.
- Learn About the Basics of Investing: The world of investing may seem complex, but it’s worth understanding. Start by learning about the stock market, where companies’ shares are bought and sold. You don’t need to become a financial expert, but having a basic understanding of how investments work can be empowering.
- Diversify Your Investments: Diversification is a fancy word that means not putting all your eggs in one basket. Instead of investing all your money in one company or one type of investment, spread it out. Diversification can help reduce the risk of losing all your money if one investment doesn’t perform well. A Stocks and Shares ISA (Individual Savings Account) can help you manage a diverse range of investments in one place.
- Start with Stocks and Shares ISA: Consider opening a Stocks and Shares ISA (Individual Savings Account) with a high-street bank. It will allow you to invest small amounts regularly and to manage a diverse range of investments – all within a normal banking app.
Summary
Saving and investing are both essential tools to make your money work for you. While saving provides security and easy to access funds, investing offers the potential for higher growth in the long-term but comes with risks.
Remember to set clear goals, build a savings safety net first and then start small and steady when you begin investing.
As you gain confidence and knowledge, you’ll be better equipped to make smart money decisions and set you on the path to financial freedom and success in the years to come. It’s your journey, and with the right tools and knowledge, you’ve got this!
