With the base rate of interest in the UK having been hiked to 0.75% in May to help combat rampant inflation, people may expect to see an increase in the value of their savings in the near term.
Higher interest rates may not be immediately available to customers, however, causing some to broaden their horizons further and consider sinking their money into a wider range of more appreciative investment vehicles.
But what distinguished savings from investment, and what are the pros and cons of each option? Let’s find out!
What Do We Mean by Savings?
Essentially, savings refer to the tried and trusted process of putting money into a simple cash product or account, in the hope that it will appreciate incrementally year-on-year.
Typically, savings accounts will be made available at a fixed rate of interest, with the value known to vary wildly from one year to another. For example, the interest rate reached 1.39% in line with a slightly higher base rate in 2019, before this plunged to just 0.64% the following year as the base rate was slashed while Covid-19 raged.
Some tax-free ISA accounts offer a slightly higher yield, of course, although you’ll have to compare the market to find the best deal due to the sheer range of products available.
The Pros of Saving Accounts:
Saving accounts are reliable of offer fixed yields
- They’re widely available and incredibly low risk
- It’s easy to qualify for a savings account and you don’t have to commit large sums of money
The Cons of Saving Accounts:
The average annual interest rate hovers around 1%
- Annual returns are negligible
- The full benefits of base rate increases may not be passed onto account holders
What About Investing?
Investing is the process of committing your hard-earned cash to financial schemes, shares or a broad range of asset classes through the open financial marketplace.
The objective here is to achieve a profit and return on your investment, although the potential yields in play vary wildly depending on your choice of asset and the wider market conditions.
For example, you can earn huge gains through speculative and derivative assets such as forex, although this also increases your potential losses and creates a much more delicate balance between risk and reward.
The Pros of Investing:
- Access a huge range of asset classes and markets
- Build a diversified portfolio to minimise your exposure and real-time market risk
- Earn considerably more on your starting capital than a standard savings account
The Cons of Investing:
- Investing requires market knowledge, understanding and determinism if you’re to be successful
- You can incur significant losses in addition to substantial gains
- Some assets (such as stocks) require a significant investment of cash upfront
So, Which Option is Right for You?
As we can see, there are various pros and cons associated with these concepts, so your choice of which option is right for you will depend largely on your unique circumstances.
For example, if you’re looking to save towards a house, savings are your best bet as you want to put this capital at risk and will be happy to bank nominal returns. Savings are also ideal for creating an emergency fund, as this should be immediately accessible and available in cash as and when required.
Conversely, investments are great if you have disposable income and want to save towards retirement over a period of years, or in instances where the base rate is low and savings accounts are offering minimum value.
Of course, the best course of action is arguably to combine both options simultaneously, as this affords you the best of both worlds and enables you to distribute your capital diversely.