Savings and investing are simply 2 ways to handle and control your money. Ultimately you want your money to work for you. So let’s look at a common question: “What’s the difference between saving and investing”
To keep things easy to understand, let’s spilt it in 2 simple steps.
What is saving ?
This is the notion of placing some money into an account, considered as a safe place. Such as a bank, building society or another financial organisation. Which can be easily accessible at immediate or short notice when you may need it. It is considered to be a simple low risk solution, so you won’t lose money but will make a small amount in return.
What is investing ?
The idea of investing involves placing your money into more riskier assets, such as stocks and shares, investment funds, ETF’s. these could be considered blue chip companies or smaller growth stocks.
Or it could be speculative investments such as gold, silver,(commodities) property, Bitcoin etc.
You can normally invest on an individual basis, where you pick your own type of investments. Or you can go through a collective process, where your funds are pooled into a fund with other investments. These areas of investing comes with risk dependent upon the reward, and they will go up and down on a daily basis. With the hope that these assets will produce greater level of investment return if held for the longer period.
So why should you save ?
Firstly to build up an emergency fund
Before you start thinking about investing, your 1st step should be create an emergency fund. Which should be held in a separate account, that can be accessed at immediate notice, to cover any undue emergency or essential items of expense. This could be for surprising car repairs, or home repairs that need fixing immediately, such as the boiler or washing machine breaking down.
Many experts believe that you should hold between 3 to 6 month’s in this type of account, to give you peace and security to meet any undue or surprising costs.
I personally like to keep £ 1,000 as a minimum amount, which can cover any such costs. I will also hold a larger amount on behalf of my wife in her account as part of out total emergency pot. I am happy with that amount, I would rather invest any excess money within my ISA. As that account is growing tax free within the ISA wrapper.
Saving for a specific item
This could be for big ticket items, such as new furniture, holidays, Christmas, special birthday’s or home improvements.
So it may be that you set goals for a specific purpose or time of expenditure. This would normally be held within a separate account, whereby you will be receiving higher level of interest. So you are being rewarded for saving with that financial institution.
It may be worthwhile to set some goals, for say the next 6 months, 12 months, or more long term such the next 5 years. Most people are living day to day, so it would be very beneficial to you, if you could change your financial mindset.
Are there times when I shouldn’t be saving.
If you have any debts, such as credit cards, store cards, bank loans, car finance etc. Whereby you will be paying interest to service that debt. It’s always more beneficial to clear those debts and eliminate the unnecessary interest expense.
Once you are then free of debt, it then allows you to allocate money into your savings account. Whereby you are making money for you, whereby with debt your are making the financial company richer. You should be making your money work for you.
So why should someone invest ?
First of all, are you ready to invest
Before you consider the idea of investing, do you have the right mindset and reasons for doing so. Firstly, why do you want to invest and what do you want to achieve over the long term.
What is your so called attitude to risk, what type of investments or assets will you be buying. Are you able that these assets will go up and down on daily basis. Although investing should be considered long term, and past performance cannot always be guaranteed. How will you react if you purchases or investments fall in value when starting out. Are you happy making investments considered outside your initial investing comfort zone.
Key points to consider:
- What is your attitude to risk
- How much are you willing to invest
- How long are going to invest for
- What are your short, medium and long term goals and aims.
- What is your personal circumstance
- Are you investing for tax reasons
- does it mean with the values of other family members, such as spouse or partner.
- Will you invest in one specific area, or across numerous asset classes.
- Why you invest yourself, or do you use a IFA (Financial Adviser)
What about short term goals:
These could be for items such as a family holiday, school trips for the children, newer car or some basic home improvements. The general rule is to save or invest for these via simple building society accounts. Although the stock market may give you better returns over the long term. As proved over recent years, through events such as COViD, Russia Conflict, Liz Truss mini budget, the market doesn’t always go up over the short term. Could be be prepared to sell an investment at a short term loss, which could affect how you invest in later years due to a bad experience.
How about your medium term goals:
This will be depend upon high much risk you are willing to take, and how much money you are willing to lock away in your investments. What types of returns are being offered to tie your money up for longer periods and can your growth of return beat inflation over the coming years.
Your goals may relate to a bigger or expensive luxury holiday, much better car purchase or a bigger home improvement. Such as a loft extension, adding an extra room, garage conversion or major renovations. Or it may for something such as family wedding.
By investing money for a longer term, you will normally receive better returns as they will be smoothed out over long time period. So should avoid any short term market shocks or uncertainty. It will also depend upon the type of assets you held and can you get access to them at short notice if required, so are they considered flexible.
What are your long term goals:
So what are considered long term, it could be moving to a newer or larger house, retirement plans, education or school fees for the children.
It is normally considered better and more appropriate to invest if you are investing for the longer term. As stocks and shares as a simple example will always outperform simple cash accounts. Over the long term the stock has produced an annual return of about 8%. You will have good and bad years, but you will be rewarded if you are prepared to invested over the long term.
One simple way to reduce your level of risk to certain investments, is through diversification. This could be by spreading assets over numerous assets classes, but are you happy managing and controlling them. Or do you want to simply your investments and their administration.
If you are going to pick stocks and shares don’t concentrate them into a few core shares in the same sector, spread them across numerous sectors or geographical countries. This could be done by simply by tracking a simple tracker fund or ETF (exchange traded fund). You could buy a worldwide tracker which covers the whole market, across all countries. It will give you greater access to holding numerous shares around the world. As some countries will perform better that others across the years, and they are extremely cheap to invest in. Fees could be as low as 0.1% as your assets are pooled with other investors around the world. You can just switch off form the market noise and eliminate any short term market sentiment, or specific events that may occur in a certain country.
Some key things to consider !
Firstly, try and determine the reasons why you are saving or investing. What are your aims and financial goals for the short, medium and long term. So find your reason why ?
Are you going pick your investments through a simple platform, I personally use AJ BELL or Youinvest, but other low cost effective companies are available such as:
Interactive Investor, Hargeaves Lansdown, Fidelity, so review your investment provider for ease of use, investment options and funds on offer, fees and charges.
Or are you going to let an IFA control your investments for a fee. You can find an IFA in your local area through the FCA register, but do a beauty parade across 2 or 3 advisers. Do some due diligence, what products do they offer, what products do they sell and manage, are they tied to a certain products or network. What reviews do they have, what fees and level of service do they provide.
Try and keep and savings or investments within a tax free savings wrapper. Such as a simple cash ISA, or stocks and shares ISA. Whereby you can invest up to £ 20,000 each tax year.
So any growth or interest you free should normally be tax-free. Any dividends received are tax-free and any profits made will remain tax-free so no capital gains tax will be payable. It will also simple your admin as you don’t have to complete any self-assessment forms or notify HMRC.
Nobody should care most about your investments than you, but we don’t teach people how to invest. So the idea or concept of making investments may appear daunting or complex.
Remember:
If you found this blog post information useful. Pease feel free to check out my other posts on https://moneyminted.co.uk which covers pensions, savings, recommended investment books. So you too can improve your financial or investment knowledge and ultimately reach your investing and financial goals.
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