Both investing and saving can help you reach your financial goals and make your money work harder. Savings should be used for short-term needs (less than 5 years) whilst investments should be considered for medium to long-term goals (at least 5 to 10 years).
The starting point when saving is likely to be a bank or building society account. With a savings account, you'll usually get back the amount you put in plus a bit extra in interest. This means they are a low-risk way to store your spare cash. This risk is the key difference between saving and investment products.
However, although cash held in savings is generally secure, the impact of inflation will reduce the buying power of your money over time, unless the growth you receive through interest is at a higher rate than the rate of inflation. The chart below shows the effect of inflation on cash savings over a ten year period.
Source: Lipper 2014. Inflation is represented by the Consumer Prices Index (CPI)
Investments are unlike savings accounts as they invest in assets such as shares, bonds and funds. Therefore there is a greater level of risk to your money, because they can go up and down in value, but this can mean greater returns. There is a possibility that you could lose some, or all, of your money, depending on how much risk you choose to take.
Because of the risk of losing money, investing should only be considered for money that can be put aside for the medium to long-term (at least 5 to 10 years) to potentially balance out the ups and downs in the markets. Investments can be made using a lump sum or regular investments of smaller amounts, usually on a monthly basis.
There are a wide range of different types of asset that can be used for an investment, and each of these will have different potential for growth and carry a different amount of risk.
When talking about investing, you will frequently see references to the short, medium and long-term. While these time periods aren’t definitive, this usually means the following:
Short-term – less than 5 years
Medium-term – between 5 and 10 years
Long-term – more than 10 years
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