Building up a healthy amount of spare money is a great position to be in. But once your savings start to grow, another question often arises:

Should you keep your money in savings, or could some of it be working harder through investments?

There isn’t one answer that is right for everyone. The best approach depends on why you’re saving, when you might need the money, your wider financial circumstances and, importantly, how comfortable you are with taking investment risk.

Savings and Investments Are Not the Same Thing

Although we often talk about saving and investing together, they perform different jobs.

Money held in a savings account is generally easy to access and doesn’t experience the day-to-day fluctuations associated with investments. This can make savings particularly suitable for money you may need at relatively short notice.

Investing is different. Your money is placed into assets that have the potential to increase in value over time, but their value can also fall.

There is therefore a trade-off between risk, accessibility and the potential for longer-term growth.

Start With an Emergency Fund

Before considering investing spare money, it is sensible to think about what would happen if you suddenly faced an unexpected expense.

Could you pay for a major car repair? A broken boiler? Or manage financially if your income temporarily stopped?

As a general guide, having around three to six months of essential living expenses available in accessible savings can provide a useful financial buffer.

MoneyHelper also recommends establishing an emergency fund before considering longer-term investing.

The exact amount you need will depend on your circumstances. Someone with a secure income and relatively low monthly commitments may view things differently from a self-employed person supporting a family and paying a mortgage.

When Will You Need the Money?

This is one of the most important questions to ask.

Imagine you have £20,000 sitting in savings.

If you intend to use £15,000 of it towards a house deposit next year, investing that money may expose it to unnecessary short-term risk. If markets fell shortly before you needed the money, you could be forced to sell your investments for less than you originally put in.

However, if the £20,000 is genuinely surplus money that you don’t expect to need for many years, the conversation could be very different.

As a broad principle, investing should usually be approached with a longer-term outlook. FCA guidance suggests thinking in terms of at least five years, allowing more opportunity to ride out shorter-term market movements.

What About Leaving Everything in Cash?

Keeping money in savings isn’t necessarily a bad thing.

Cash can provide security, certainty and easy access. It can therefore be entirely appropriate for emergency funds and shorter-term plans.

However, there is another risk that isn’t always as obvious: inflation.

If the interest earned on your savings fails to keep pace with rising prices, your money can gradually lose purchasing power. Your account balance may have increased, but what that money can actually buy could have fallen.

This is one reason people with longer-term financial goals may consider investing part of their money rather than holding everything as cash.

How Comfortable Are You With Risk?

This is where financial planning becomes very personal.

Investments rise and fall in value. If seeing £20,000 temporarily become £17,000 would cause you considerable concern, that needs to form part of the decision.

There is also a difference between your attitude to risk and your capacity for loss.

You might personally feel comfortable taking significant investment risk, but that doesn’t necessarily mean your financial circumstances allow you to do so.

For example, someone investing money they won’t need for 15 years may have a greater capacity to tolerate short-term falls than someone who expects to need the money in three years.

You Don’t Necessarily Have to Choose One or the Other

The decision isn’t always simply savings OR investments.

For many people, both can form part of a sensible financial plan.

You might keep an emergency fund readily available, retain additional cash for planned expenditure over the next few years and consider investing money intended for longer-term goals.

Investments themselves can also be spread across different assets, markets and geographical areas rather than relying too heavily on one company or sector. This is known as diversification and is an important way of managing investment risk, although it cannot remove risk altogether.

Don’t Forget About Your Pension

If you have surplus income or savings and your ultimate objective is retirement, it can also be worth considering your pension as part of the wider picture.

Depending on your circumstances, increasing pension contributions may be an option alongside other forms of saving and investing.

The important point is to consider your finances together rather than viewing your savings account, investments and pension as completely separate decisions.

So, Should You Save or Invest?

Before making a decision, ask yourself:

• Do I have sufficient emergency savings?
• Do I have expensive debts that should be addressed first?
• What am I ultimately trying to achieve with this money?
• When am I likely to need it?
• How much investment risk am I comfortable taking?
• How much could I actually afford to lose?
• Are my pension and other existing investments being considered as part of the decision?

The answers can help determine whether keeping your money in savings, investing some of it, or using a combination of the two may be more appropriate.

Savings and Investment Advice in Doncaster

At Clear Finance, we understand that financial planning isn’t about finding a single solution that works for everyone.

Your age, income, existing savings, family circumstances, future plans and attitude towards risk can all influence how your money should be managed.

If you’ve accumulated savings and are wondering what to do next, speaking with a financial adviser can help you understand the different options available and build a strategy around your individual objectives.

Looking for savings or investment advice in Doncaster? Speak to Clear Finance about your circumstances and longer-term financial goals.

The value of investments can fall as well as rise and you may get back less than you invest.

This article is for general information only and should not be regarded as personal financial advice. The suitability of savings and investments will depend upon individual circumstances.

For more information about our Financial Services and products in Doncaster call 01302 835938

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