Craig Skelton explains why investing money is more effective than saving.
Why investing money is more effective than saving
Saving money is a great way to prepare for unexpected expenses, but when it comes to planning for the future, investing your money has the potential for higher growth.
A lot of people put their money in a savings account and leave it there to accumulate interest. While this is a good strategy in the short term, you potentially risk losing out on higher returns in the long run, while also struggling to keep up with inflation. However, investing is a good approach if you have long-term financial goals and want to earn more money than you could by saving it.
What’s the difference between saving and investing?
With saving you are setting aside cash for future use, while investing means using cash to buy assets that you expect to produce a profit or income. The biggest difference between saving and investing is the level of risk. With saving you will always get back at the very least what you have put in, as well as any interest on your deposits. You won’t lose any money, making it a less risky option.
Investing your money means it will rise and fall over time and there is a chance you could lose some of your initial investment. Your Financial Adviser will be able to help you make sure you’re aware of the risks and the length of time required. A longer timeframe (at least five years) will give your investment more time to recover if there are any sudden market swings.
Types of investments
The main types of asset classes that investors could choose from – which your adviser can go into detail with you – are equities, bonds and property.
Different asset classes have different levels of risk and return. The safer an asset is the lower the returns will be, while the riskier an asset is, the higher the returns.
Equities are also known as stocks and shares, equities are issued by a public limited company and can be bought and sold on stock exchanges. When you buy an equity, you are basically buying a piece of that company and becoming a shareholder. Equities can make you money through increases in share price or you can receive income in the form of dividend payments.
The disadvantage is that returns are not guaranteed and the share price could fall below the level that you invested.
Bonds are sometimes called fixed-term investments. Bonds are issued by governments and companies looking to raise money. A bond is essentially a loan made to a company or a government by an investor for a set period of time – usually a number of years.
In return they pay you a regular income in the form of interest over the life of the bond, after which they must repay your loan. Bonds typically offer stable returns and are a lower risk than equities, although they tend to offer lower returns in the long term.
This could be investing in commercial property through investment funds, including retail, office and industrial property. It makes a good long-term investment and is effective at beating inflation. Property can add diversification to your portfolio as it tends to perform differently to other assets in response to different market conditions. However, property does come with its risks, including a risk of a fall in value as well as the maintenance costs and can take a long time to sell.
Investing can beat inflation
Investing is a better option if you’ve got longer-term goals because inflation can erode the value of cash savings over the medium to short term, and your money may not have the same spending power as when you first put it away.
If you have £2,000 in savings and the bank offers a 1% interest rate, each year you will get back £20. However, if the inflation rate is 6% the cash in your savings account will fall in value. After one year your cash would be worth £1,887 in real terms. After five years it would be worth only £1,495.
- Saving money is great for unexpected expenses, but if you’re looking to build your wealth for the future you can earn more by investing over the long term.
- Main types of asset classes that investors can choose from include shares, property and bonds.
- Inflation reduces the value of your savings over the long term, so you won’t be able to buy as much. If you invest your money you’ll be able to beat inflation over the long term.
Speak to your Financial Advisor to find out about a range of investment opportunities to help you meet your financial goals.The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.