Investing or saving – which is the best option?
- Credit: Getty Images/iStockphoto
Regular lockdowns enabled some consumers to reduce their outgoings, which resulted in savers depositing more money into savings accounts than before the pandemic. Figures released by the Bank of England showed that during August consumers deposited £9.1 billion into savings accounts; in the year to February 2020, the average amount of deposits each month was £4.7 billion. The amount of excess money stashed into savings accounts has led to some finance experts warning that rising inflation and the current low saving rates could mean savers are at risk of seeing the value of their savings eroded in real terms. Some savers might be better off investing instead.
Most finance experts still urge savers to hold three to six months’ worth of income in an accessible savings account, usually an easy access one, to provide a safety net in the event of unforeseen emergencies. Once this has been saved, however, savers have more flexibility in what they decide to do with their excess savings.
Those who want the security of knowing that their money is safe and how much interest they will earn on their savings may want to stay with a savings account. They could opt for a fixed rate bond, which requires savers to ‘lock’ their money into the account and usually do not allow further deposits to be made or withdrawals until the term of the bond has ended. In return for ‘locking’ money into the account, fixed rate bonds often offer the best rates in the savings charts – with longer term bonds normally paying the best rate.
Although this is the safer option, at the time of writing, the top paying fixed rate bonds pay a below-inflation rate. This means that savers locking their money into the bond will, despite earning interest on their savings, see inflation erode the value of the savings.
Investments can offer a more attractive return, but investing carries much greater risks. The biggest risk is that the value of the investment falls, resulting in the investor losing money on their investments and, in some cases, their initial deposit as well. Normally, investors will aim to hold their investments for the long term, usually a minimum of five years but often for at least 10 years or more, which helps the investments to recover from any market falls.
This means that investing is often not a good option for short-term savers, or those who might need to access their money.
As well as this, unlike savings accounts, investments usually require investors to spend time researching their best options and monitoring their investments. For example, those considering investing should carry out research into the different investment options available, which investments suit their risk appetite, how the current economic climate may impact their investments and consider any tax implications of investing.
Despite the risks involved with investing, as the value can go up as well as down, along with the time needed to research and monitor investments, for long-term savers it can be a good way of achieving returns that cannot currently be gained on savings accounts.