Saving vs investing: a comprehensive guide
Choosing to save or invest your money can seem difficult and daunting. Explore the key differences between saving and investing – the pros, the cons, the best ways to invest savings, and more.
What are the differences between saving and investing?
Saving and investing differ in several ways, even though people save or invest with similar goals, eg to accumulate cash to use later on. Investing is putting money into the likes of financial schemes, company shares, bonds, property, or commercial ventures with the expectation of a return on investment (ROI), ie profit. Investing can be done by individuals, or on a larger scale by wealth managers, hedge funds, private equity firms, etc.
While investors may realise ROI, they might also end up getting back less than their initial outlay, or even lose it all. In the case of company bankruptcies, for example, the share price goes down to zero (essentially making shares worthless) – eligibility for pay-outs from asset liquidation depends on the class of shares owned.
There are some ways in which investors can mitigate risk. These include diversifying their portfolios. Diversifying a portfolio is investing in a number of distinct opportunities – this is often done to mitigate risking your entire capital in one or a few investments.
Saving, on the other hand, is putting money away through an official scheme, usually via a bank account. With saving, your money’s nominal value is protected, plus you earn income in the form of interest at a certain rate. You may want to save money for a variety of reasons; for example, to afford a mortgage deposit to buy a house.
So, the main difference between investing and saving is the potential to realise returns that are much more than said interest; but this trade-off comes with exposing yourself to the possibility of losing money (with investing).
Advantages of investing
- Earn a profit: the most obvious benefit is exiting an investment with more cash than you started with, which is the typical aim with investment activity
- Protect your money against inflation: inflation erodes the value of the cash that you hold. Leaving your cash in a regular savings account means that the bank will pay you interest on your funds at a rate of about 1% to 4.5%. This means that when inflation is high, the real value of your money is low. Investing offers the potential to receive a return that’s higher than this, therefore protecting you (somewhat) against inflation
- Save time and effort: in some instances, not much time and maintenance are needed to invest. For example, our Smart Portfolio is a fully managed portfolio that you outsource to professional investment managers. Even if you choose to manage your own portfolio, it still doesn’t have to be a time-consuming process. When investing in stocks, for instance, you can buy and hold with the aim to profit over the long term
- Find your preferences: with a wide range of assets within the stocks and exchange traded fund (ETF) markets, as well having the option to have your portfolio managed, you can choose what works best for you
- Get tax benefits: you have a capital gains tax (CGT) allowance of £12,570 for the 2022/23 tax year, which can help mitigate a potential CGT bill. You may also get tax benefits with certain investments types under UK law, eg a tax-free allowance on dividend income. With an IG stocks and shares individual savings account (ISA),you get tax-free growth or interest. Likewise, a self-invested personal pension (SIPP) offers gains that are free from CGT. Additionally, tax relief may be available on pension contributions for UK investors1
- Mitigate risk efficiently: investing offers ways of managing your risks flexibility. We empower investors of all experience levels to understand their appetite and aversion to risk. When signing up for an IG Smart Portfolio, for instance, you’re required to answer a series of questions that are designed to help you to determine what your risk appetite is so that you can choose the appropriate portfolio type.
Disadvantages of investing
- Possibility of losing money: investing isn’t a guaranteed way to make profit – with any investment there’s an inherent risk that your position may lose money, possibly the entire initial outlay. You can use technical and fundamental analysis to help you increase your probability of success, while mitigating risks as far as possible
- Investments are typically held for a long time: investing usually means buying and holding an asset – ie direct ownership – for an extended period. This can be challenging as it requires discipline, coupled with a degree of risk in some situations, to not exit an investment at the wrong time
Advantages of savings
- Low to no risk of loss: when saving money, there’s no risk that you’ll incur a loss. The UK FSCS protects clients for up to £85,000 (£170,000 for joint accounts) should their bank (or other financial service) go bust. Anything over this will likely not be protected
- Clearly defined gain from interest: savings accounts offer you interest for holding your money with a bank or other financial institution. This means each year you get a guaranteed return on your savings
- Tax efficient options available: accounts such as cash ISAs were created to encourage people to save money. ISAs are a tax wrapper which shelter your money from tax. You can subscribe up to £20,000 per year. With a cash ISA, you won’t pay any tax on savings income. Tax may be due, however, on interest earned from a savings account (money not held in a cash ISA). It’s important to note that you’d have no allowance left to invest via a stocks and shares ISA to reap tax-free benefits if you were to subscribe your full allowance to a cash ISA1
Disadvantages of saving
- Loss of purchasing power with inflation: the value of your money is eroded by inflation; meaning that as time passes (and prices increase), you’re able to afford less and less with the money you have
- Low returns: you can expect to earn a small amount on your money saved through interest (offered by your savings account provider), but this is likely to be minimal. Comparatively, the return on savings is usually lower than the returns on investments over longer term
Tips for growing a savings account
- Set goals: understand what you’re trying to achieve by saving. It may be that you want to put away £100 a month, or £1000 a year
- Understand your finances on a broader spectrum: by taking stock of your incoming and outgoing funds you’re in a better position to find out how much you can save; and therefore, how feasible your goals are and how long it’ll take to reach them
- Cut costs in everyday life: this can be anything from spending less than £20 a month on a particular item, to cancelling unused subscriptions. Be smarter when making purchases; do you really need that new jacket/watch/oat milk latte?
Is it worth investing?
Yes, investing is worth it if you have disposable income that you can afford to put away for an extended period. Many people around the world supplement their income with investments. Some investments are used to save for retirement. The sky’s the limit if you think you have what it takes to make some shrewd financial decisions.
Ultimately, choosing to invest or save (or both) boils down your unique circumstances, your goals, and if you’re feeling ready to get started. But remember that risk is involved – you could incur a loss instead of benefitting from the potential for reward.
How much should one invest?
There’s no way of quantifying this value, unfortunately. What’s important to understand is that the more money you’re able to invest, the more potential returns you can generate. You can start to invest your from as little as £500 through an IG Smart Portfolio. However, you must remember that as much as there’s a chance to make a profit, it’s also possible to incur a loss on your capital.
1 Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK.
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Discover how to trade the markets
Explore the range of markets you can trade – and learn how they work – with IG Academy's free ’introducing the financial markets’ course.