There's an old Chinese proverb that says, “The best time to plant a tree was 20 years ago. The second-best time is now.” This wisdom holds true for investing, which is essential for long-term growth. However, some people prefer a more conservative approach and choose to save. Saving is always a wise approach. Save for a rainy day - not because you expect storms, but so you can dance in the rain without worry.
You may be wondering which strategy you should choose. In truth, whether to save or invest depends on your financial goals, time horizon, and risk tolerance. Saving is generally suited for short-term goals, while investing is geared toward the long term. As the quote above alludes to, in the short term, it’s wise to build up an easily accessible ‘rainy day’ fund for unexpected expenses. For longer-term goals, however, investing can be a smart strategy to help grow your money over time.
This article will breakdown both methods to help you decide which is most suitable for you.
Pros and cons of both saving and investing
Saving
If you’ll need access to your cash within the next five years, saving might be your best option. However, please remember that cash savings aren’t entirely risk-free. Cash often struggles to keep up with inflation, meaning your purchasing power could decrease over time.
For short-term goals - like a wedding, a potential home purchase, or a big holiday - keeping funds in a regular savings account or high-yield savings account is typically the safest choice. Plus, this serves as your safety net, your emergency fund, for life’s unexpected costs, such as a broken boiler or car repairs. Ideally, this should be 3-6 months' worth of expenses and kept liquid and safe (like in a savings or money market account).
If you have a low risk tolerance, cash savings may be ideal. If market fluctuations tend to cause you stress, saving rather than investing could provide peace of mind. Additionally, savings accounts offer easy access to your money whenever you need it.
If you're looking to improve your cash returns, there are a wide variety of savings accounts offered by banks and building societies. For those who wish to shield their cash savings from UK income tax, Cash ISAs are also available (subject to T&Cs). Keep in mind that ISA tax rules can change, and their benefits will depend on your personal circumstances.
Investing
Investing involves allocating your money to avenues beyond cash, aiming to build your wealth over the long term. Unlike cash, which offers security, investment returns can fluctuate up and down, and you could lose up to 100% of your initial investment. this is why it is important to invest in a diversified portfolio in order to mitigate risk and maximise opportunities for growth.
If your time limit is five years or more - such as for retirement or long-term financial goals - investing can be a great choice due to its potential for higher returns over time. Common investment options include shares, bonds, property, and investment funds.
Investing is best suited for those with a tolerance to risk. If you can navigate market fluctuations and don’t need immediate access to your funds, the potential for better returns may make investing worthwhile. Additionally, investing can help you outpace inflation, safeguarding your purchasing power.
You can also take a hybrid approach: save for security while investing for growth. Many people maintain an emergency fund in savings and invest extra funds to build their wealth, striking a balance between safety and potential growth.
If you require access to your money in a few years or prefer a lower risk, saving is the way to go. For long-term growth, investing is advisable. A balanced strategy - ensuring adequate savings for short-term needs while investing for future wealth - is often the best path forward.
If you want some impartial advice, MoneySuperMarket has put an article together which may help you decipher if it is best to save or invest.
Long term retirement goals
Pensions are a strong option because of their tax relief benefits, but they do require you to lock away your funds until pension access age.
On the other hand, savings accounts offer security but typically come with lower returns. Of course, for cash savings, you can usually take the money as you please – which is great if you need the cash, but bad if you are not disciplined.
Investments can provide higher returns but involve greater risks, along with fees and potential charges when liquidating assets. You can usually take funds from your investments, but it depends on the situation. Ultimately, it's about finding the right balance that suits your individual situation.
If you want to find out how retirement may look for you, please take a look at our handy article which will walk you through the stages of retirement.
Let’s look at both savings and investments.
Pensions and savings are crucial for retirement planning. Pensions provide a reliable source of income during retirement, helping to cover essential living expenses.
Contributions to pensions and certain savings accounts often come with tax relief, allowing your savings to grow more efficiently over time. Furthermore, pensions and dedicated savings accounts encourage disciplined saving habits, ensuring that you set aside money for the future. Savings accounts offer a safe place for your money, providing peace of mind and liquidity for emergencies or short-term needs.
Both pensions and long-term savings can grow through interest or investment returns, helping to build a substantial nest egg for retirement.
In summary, pensions and savings are essential tools that help ensure financial security and stability in retirement.
Investing is beneficial for long-term retirement goals for several key reasons.
Firstly, there’s potential for higher returns. Historically, investments in stocks, bonds, and other assets have provided higher returns than traditional savings accounts or cash. This growth can significantly increase your retirement savings over time.
Furthermore, compounding growth is a major pull. Investing allows you to take advantage of compound interest, where the returns you earn begin to generate their own returns. Over the years, this compounding effect can lead to substantial growth in your investment portfolio.
Investing can also help your money grow at a rate that outpaces inflation, protecting your purchasing power over time. This is particularly important for retirement, as inflation can erode the value of your savings.
Diversification is another key element. Investing allows you to spread your money across various asset classes (like stocks, bonds, and property), reducing risk. A diversified portfolio can help safeguard your retirement savings against market volatility.
There are also tax advantages. You could receive immediate tax relief when making a personal contribution to a pension, and if you are a higher rate tax payer can claim back additional rate relief via self-assessment.
Lastly, it can allow you to have financial independence. By investing wisely, you can work towards financial independence, giving you more freedom in retirement to pursue your interests, hobbies, or travel without worrying about financial constraints.
In summary, investing is a powerful tool for building a substantial retirement fund. By starting early and maintaining a disciplined investment strategy, you can enhance your financial security and enjoy a more comfortable retirement.
At Reeves Independent we specialise in identifying the perfect investment solutions for you. As independent financial advisers, we have access to the entire market, providing a wide array of products and options to help you manage your finances in line with your defined risk profile. Please download our Investment Services guide to see how we could help you with your investment strategy.
Having a mix of savings and investments is a smart financial strategy for your long-term retirement goals. Savings offer stability and liquidity, while investments provide potential for higher returns. It also allows for flexibility, as this combination helps meet both short-term needs and long-term goals. Furthermore, it protects against inflation. Investments can grow faster than inflation, preserving purchasing power, while savings keep your cash safe.
Different financial goals require different approaches - savings for short-term needs and investments for long-term growth. It can also provide you with peace of mind. A balanced mix reduces financial anxiety, providing security now while planning ahead.
In summary, combining savings and investments creates a well-rounded financial strategy, offering both security and growth potential.
Growth potential – relying on savings may not be enough
Savings alone may not be enough for retirement for many reasons.
As touched upon, over time, inflation erodes the purchasing power of cash savings, meaning the amount you save may not buy as much in the future.
Furthermore, people are living longer so it can be important to understand your financial situatuation as early as possible to have a robust plan in place for your retirement. Relying solely on savings can increase the risk of outliving your funds. It can be a good idea to work with an adviser to remove the stress of getting the plan in place.
On top of that, traditional savings accounts typically offer low interest rates, which may not keep pace with inflation, leading to stagnant or even diminishing value over time.
Over the past few years, we have seen the cost-of-living crisis continue to put pressure on household budgets. As living expenses increase, relying only on savings may not provide enough income to maintain your desired lifestyle in retirement.
There is also a lack of growth. Savings accounts do not offer the same potential for growth that investments do. Without growth, your savings may not accumulate enough wealth to support your retirement.
Investments are beneficial for growth as they typically offer higher returns than savings accounts, allowing your money to grow over time. By taking advantage of compound interest and market performance, investments can help build wealth and outpace inflation, making them essential for long-term financial goals.
A mix of savings and investments is essential for a balanced financial strategy. Savings provide security and liquidity for short-term needs and emergencies, while investments offer the potential for higher returns and long-term growth. This combination helps protect against inflation, meet varying financial goals, and ensure financial stability throughout different life stages.
Reeves Independent is here to assist you with your pension, savings, retirement, and investment planning. Book a free, no-obligation review today to begin your journey toward a secure financial future. Let us help you achieve your goals!
