SAVINGS & INVESTMENTS

Introduction To Savings & Investments

Turn today’s savings into tomorrow’s goals

Why save?

Saving is the process of setting money aside for future use. It is generally the safest way to accumulate funds for specific goals. People save for various reasons, from short-term needs such as holidays or Christmas expenses, to larger planned purchases like a car or a deposit for a house.

A key reason for saving is to build an emergency fund. This is a cash reserve that is easily accessible, intended to cover unexpected costs, such as a boiler breakdown or a period of reduced income. A common guideline is to have enough to cover 3 to 6 months of essential living expenses.

While saving is less risky than investing, its growth potential is limited. The return you receive is usually just the interest paid by the bank or building society. Although this provides security, the value of your savings can be eroded over time by inflation if the interest rate you earn is lower than the rate at which the cost of living increases.

Where Can I Put My Money?

A wide range of savings products exists to meet different needs. While cash savings are typically low-risk, it is important to remember that in the UK, eligible deposits are protected by the Financial Services Compensation Scheme (FSCS) up to certain limits.

Common savings vehicles include:

Easy-access accounts: Allow you to withdraw your money whenever you need it, offering flexibility but often with lower interest rates.
Fixed-rate bonds: You lock your money away for a set term (e.g., 1 to 5 years) in return for a higher, fixed interest rate.
Regular saver accounts: Designed to encourage a savings habit, these require you to deposit a certain amount each month and can offer attractive interest rates.
Cash ISAs (Individual Savings Accounts): A tax-efficient way to save where you do not pay tax on the interest you earn.
Premium Bonds: Instead of paying interest, this government-backed scheme enters you into a monthly prize draw for tax-free cash prizes.

What's The Difference Between Saving and Investing?

Saving is often the initial step towards investing. You can be a saver without being an investor, but generally, you need savings before you can start investing. The key difference lies in the balance between risk and potential reward.

Saving involves depositing money into cash-based products like bank accounts. The main aim is to protect the capital. You take very little risk, and your initial capital is usually not at risk of losing value (although inflation can reduce its purchasing power). Saving is suitable for short-term goals and emergency funds.

Investing is the act of using your money to try to achieve a higher return than cash savings can provide over the medium to long term. When you invest, you purchase assets such as shares, bonds, or property, hoping their value will increase.

As an investor, you accept a higher level of risk. The potential returns are not guaranteed, and there is a real possibility that the value of your capital could decrease. You might get back less than you initially invested. So, why take this risk? The simple answer is that over longer periods (usually five years or more), investing can potentially generate much higher returns, helping your money grow faster than inflation.

Key principles of investing include managing volatility (the short-term fluctuations of the market) and diversification (spreading your money across different assets to minimise risk). You can hold investments within tax-efficient wrappers like Stocks & Shares ISAs or pensions to aid their growth.

What Should I Do Now?

The world of savings and investments is extensive, offering many different products and options. Since investing involves risk and the choices you make can influence your financial future in the long term, it is advisable to seek expert advice that can be personalised to your individual circumstances and objectives.