What’s the difference between saving and investing my money?

Saving and investing are two different ways to handle your money.

Saving is like putting your money in a safe place, like a bank account, where it can be easily accessed whenever you need it. It's low risk, meaning you’re unlikely to lose your money. 

Investing involves putting your money into things like company shares, or in property. You can do this either by buying the assets directly, or through a collective investment fund where your money is pooled with that of other investors. This comes with some risk because the value can go up or down, but there's a chance for higher rewards compared to saving.  

It’s important to build up an emergency savings fund.

It’s a good idea to have at least three to six months’ worth of living expenses saved up in an instant access savings account. This should include rent, food, school fees and any other essential outgoings. 

Your emergency fund means you have some financial security if something goes wrong.

Once you’ve built up an emergency fund, you might want to consider setting yourself savings goals to build up funds to buy the things you want.

You could also start to think about investing your money if you don’t need the money in the next five years.

The only time you shouldn’t save or invest is if you need to get your debts under control.

Before choosing to invest your money, remember that there’s always the risk that your investments can go down as well as up. That means you could lose money.

Choosing whether investing is right for you also depends on:

• how much cash you have available
• your personal attitude to risk and capacity for losing money
• what your personal circumstances are.

You also need to consider your goals – specifically if they’re long, short, or medium term:

• short-term goals are things you plan to do within the next five years, such as take a holiday
• medium-term goals are things you plan to do within the next five to ten years, such as save for a mortgage deposit
• longer-term goals are ones where you won’t need the money for ten years or more, such as a retirement fund.

For your short-term goals, the general rule is to save into cash deposits, such as bank accounts.

The stock market might go up or down in the short-term, and if you invest for less than five years you might make a loss.

For the medium-term, cash deposits might sometimes be the best answer. But it depends on how much risk you’re willing to take with your money to achieve a greater return on your investment.

For example, if you’re planning to buy a property in seven years and you know you’ll need all your savings as a deposit and don’t want to risk your money, it might be safer to put your money into a savings account.

However, bear in mind that your savings will still be at risk from inflation.

This is where the interest you earn on your savings fails to keep up with the rate of inflation so the buying power of your money is reduced.

If your needs are more flexible, you might consider investing your money. This is providing you’re prepared to take some risk with your original capital to try and achieve a greater return on your investment than would be possible by saving alone.

For longer-term goals, you might want to consider investing. This is because inflation can seriously affect the value of cash savings over the medium and long-term.

Stock-market based investments tend to do better than cash over the long-term, providing an opportunity for greater returns on any money invested over time.

You can lower the level of risk you take when you invest by spreading your money across different types of investments. This is called diversification.

When investing, it’s a good idea to consider if you would benefit from professional advice from a regulated financial adviser.