Is It Better to Invest or Save Money? How Much Money Should I Keep in Savings?

If you want to be financially strong, both savings and investments are important. However, they are not the same. While savings are safe, investments come with different levels of risk. You will clearly need both to create long-term wealth for yourself. But first, let us take a closer look at each of them.

Savings

Saving money is known to be safer than investing, but if your aim is wealth creation, then the latter might be a better choice, especially over the long-run. Saving money gives you a low rate of return. Presently, the best interest rate for savings in the UK is less than 2 per cent.

Secondly, if the rate of inflation is less than the prevailing interest rate, the real value of your money kept as savings will go down over time. This will dent your savings.

At the same time, in case you want to have readily available cash for any immediate usage, savings is the best choice as they can be liquidated fast. Further, savings are not just easy to do, they can be done with minimal banking fees.

Also, in case you want to be sure that you want to have a certain amount of money at a particular time in the future, say to pay for your child’s education, savings may be a good choice in that case too.

While savings can be done for any period, but a longer period, say 5 years, usually gives the maximum return, so go for that if you can.

Also Read: How big is the UK stock market?

Investments

On the other hand, when you invest your money in, say stocks  bonds, gold, real estate or mutual funds, you can expect your investment to make money for you, though it comes with a risk. Usually, investing money can bring a comparatively higher returns to savings accounts. So, they can potentially bring much higher protection against inflation.

By investing your money, you are basically looking at a better return in lieu of taking more risk. But do keep in mind that there is always a real possibility of losing a part of all your invested capital. This brings us to the point that while savings can be done even by a layman, but for investment, you need knowledge of the stock market, and it is a relatively harder task.

Typically, you will need the services of an investment broker or a brokerage account to buy and sell stocks and bonds etc.

To get good returns on your investments, market experts suggest keeping your funds invested for at least a period of five years. In such a scenario, it is important to invest only that part of your money that you do not need immediately.

Finally, many of the investing products are also very liquid – such as stocks, bonds or funds. They can simply be converted into cash in no time. However, you might not receive the exact sum of money you had invested, depending on when you want to cash in.

Also Read: How Do I Buy Shares in the UK?

How much to save and invest?

The most basic rule is – first save, then invest.

As a thumb rule, keep enough money available in the form of savings that can cover up to six months of your living expenses in case any emergency arises. Then, you can safely consider investing the rest of your money.

Many financial planners advise to save 10 per cent of your annual income and invest the next 10 or 15 per cent of it.

Experts also suggest that if you are just beginning to invest your money, mutual funds are a great way to start. A mutual fund holds together money from a pool of people and invests it across a mix of stocks, bonds and other assets. The combined holdings of this fund are called its portfolio.

As a rule, first, prepare your monthly budget and compare it to your income. Decide the amount you can comfortably save on a regular basis and then stick religiously to your plan. Then comes the turn of your investments. It is ideal to talk to a certified financial advisor to choose the right mode of investment for yourself.

Always keep a long-term horizon while selecting your investment plan. Finally, increase your investment over time as your income grows.