Saving and investing are both good ways to grow your money but they are quite different. How do you decide whether to save or invest?
What’s the difference between saving and investing?
Saving means putting money aside in a bank deposit or regular savings account and earning interest on that money. People generally save for a particular goal - a new car, a deposit for a house, or to build up a rainy day fund – knowing that their capital is not at risk.
Investing typically means committing your money for a longer period of time in the hope of making more money than you would by saving. There is risk involved. There is usually no guarantee that you will make larger amounts of money or even that you will get all of your capital back. However, depending on how your investments perform, you could grow your money considerably more than you would by saving.
Will you need to access your money within 5 years?
Are you happy to invest your money for more than 5 years or do you think you might need it sooner? If you think you might need it within 5 years, you might want to consider savings accounts instead of investments.
Can you leave your money untouched for more than 5 years?
But if you can commit to investing for more than 5 years, there are a range of options for you to choose from which could potentially provide better returns than deposits in the longer term. This could be important if you want to you achieve longer term goals such as building a child’s education fund or saving towards your retirement. Finding which approach is right for you is important.
When should you consider investing?
You may want to consider starting to invest after you have built up some savings in a ‘rainy day’ fund, paid off any high-interest debts and committed to a retirement plan.
Have you built-up your rainy day fund?
Before investing, try to save at least 3 to 6 months’ of living expenses so that you are covered if you suddenly have to pay for a sudden unexpected event such as a gap between jobs or having to replace a car.
Set up a direct debit or standing order to pay money into a deposit account or a regular saving account as soon as you get paid. You can start from as little as you like a month, the most important thing is to start.
Have you paid off any high-interest debt?
If you have a high-interest loan or a credit card debt, you are usually paying interest payments as well as repaying the capital. By paying off the high-interest debt in full as soon as possible, you’ll reduce the total amount you owe faster, freeing up money to put toward savings or investing later on.
Are you making pension contributions?
If one of your long-term goals is a comfortable lifestyle in retirement you should contribute the maximum amount you can afford into your retirement accounts.
Are you putting money aside towards kids’ college expenses?
It is important to start putting money aside for your children’s 3rd level education as early as possible if you can. If these expenses are more than 5 years away you may consider the investment options available.
Investing in funds is straightforward and accessible. Whether you’re new to investing or a more experienced investor, you can choose an approach to suit your financial goals and preferences.
Saving and investing compared
Ready access to cash
A savings or deposit account gives you access to your cash when you need it. Some deposit accounts have restrictions on the amount, frequency or notice required to make withdrawals.
Usually used for long-term goals
Investing can help you reach long-term goals, such as paying for a child’s education or planning for retirement.
Involves minimal risk
Your funds are covered, subject to limits, by the deposit guarantee scheme.
Longer-to-access invested funds
When you invest your money, you may not have access to your money for a set period of time or it can take a few more days or weeks to access your money compared to a savings account.
You can earn interest by putting money in a savings account, but savings accounts may earn a lower return than investments.
Always involves risk
Investing does not guarantee a return, and it is possible to lose some or all of the funds invested.
Interest rates are particularly low at present but even over long periods of time, the returns from deposits are lower than other investment options.
Investments have the potential for higher returns than a savings account.