Save or invest: how to time it right
Savings rates have hit 15-year highs but investing may still prove more profitable
Deciding whether to keep money in cash or take more risk by investing is becoming trickier than ever as saving rates climb.
Savers can finally earn a “respectable amount of interest” on their savings, said MoneyWeek, as banks and buildings societies pass on some of the Bank of England’s recent rate rises. Some easy access accounts have been “edging towards” 5%, and fixed-term saving deals have topped 6%.
But just because savings rates are rising does not mean cash is “keeping pace with inflation”, said Schroders. With the UK’s annual inflation rate at 6.8%, cash returns – or “real” returns – “remain negative”.
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According to MoneyWeek, pumping that money into the stock market instead would be “highly likely to net you a bigger return” if the investment is for “at least five years”. But investing also “involves risk”, the site added, and timing is a key factor.
Saving vs. investing
Putting money into a savings account has “very little risk, which is good for short-term goals”, said MoneySuperMarket. Even if the bank goes bust, the first £85,000 of your savings should be protected by the Financial Services Compensation Scheme (FSCS), as long as the savings provider is regulated by the Financial Conduct Authority (FCA).
By contrast, the aim with investment is to make your money “grow in value over time and give you a better return” than from a savings account. But since investments can go down as well as up, experts “always tell customers to spread” their money across different assets such as stocks, funds and property, and to “invest for the long term to smooth out any fluctuations in performance”.
Investing can be “risky in the short run”, said Schroders, yet “when viewed against inflation they have offered far more certainty in the long run”. For every 20-year timeframe in the past 96 years, investing in shares “delivered inflation-beating returns”.
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When to save
Having an emergency cash savings fund is important to ensure “you have a bit of money to fall back on should you need it”, said Rest Less. Experts recommend between three and six months worth of income as the “ideal amount”, but the “golden rule” is that any amount which you can afford to put aside is better “than nothing”.
Saving is also likely to be the best option when “you’ve got a short-term goal in mind, like a holiday, wedding or even a house purchase”, said Hargreaves Lansdown, and when “you want to be able to access your money straight away”.
Money can be put in easy access or savings accounts with banks and building societies; premium bond products with National Savings and Investments; or you can earn tax-free returns with a cash Isa.
When to invest
Before investing, prioritise paying off debts first, as the interest rate on loans and credit cards is “likely to be many times higher than the rate of return on any investment you make”, said the Financial Conduct Authority.
The timing may be right to invest if “you’ve saved a supply of cash that you can access easily for emergencies” too, said Hargreave Landsdown, and “are willing and able to accept a level of risk”.
“You do not need a lot of money to begin investing,” said The Balance. And although you may have to lock up your money up for longer than with a savings account, “even small amounts of your money can earn money faster due to the power of compounding” .
There are many different ways to invest, including buying shares and investing in a fund. “You can also shelter your money from tax using a stocks and shares Isa or personal pension,” said MoneyWeek. An Independent Financial Adviser (IFA) may be able to help decide which is the best option for you.
Ultimately, how and when to invest will depend on your personal circumstances. Just bear in mind that “investors who opt for stock markets over cash need to be prepared for a bumpy ride”, said Schoders.
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Marc Shoffman is an NCTJ-qualified award-winning freelance journalist, specialising in business, property and personal finance. He has a BA in multimedia journalism from Bournemouth University and a master’s in financial journalism from City University, London. His career began at FT Business trade publication Financial Adviser, during the 2008 banking crash. In 2013, he moved to MailOnline’s personal finance section This is Money, where he covered topics ranging from mortgages and pensions to investments and even a bit of Bitcoin. Since going freelance in 2016, his work has appeared in MoneyWeek, The Times, The Mail on Sunday and on the i news site.
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