Saving vs investing

What is saving?

Saving lets you earn interest on your money. Generally, people save the money that they might need in the short or medium term. This includes things like an emergency fund to cover unexpected expenses, or to build a pot for something that they can’t afford to buy immediately.

Saving is safer than investing, because your money isn’t exposed to the ups and downs of the market. Instead, you’ll have to keep an eye on interest rates and whether you’re getting the best return on your cash. When interest rates are low people might look to investing to generate better returns, but this comes with the risk of losing money.

What is investing?

Investing means you’ll be buying an asset with your money in the hope that they increase in value over time. There are lots of different assets that you can invest in, from funds that automatically spread your money over a group of different companies, to shares in individual companies that you want to own a piece of.

Before you invest, it’s important to have an emergency fund in place. This will be your safety net to cover unexpected expenses without having to withdraw from your investments. Think of an emergency fund as step one on your personal finance journey – once you’ve got one, it opens the door to explore things like investing.

Saving vs investing returns

The returns of saving and investing will be different because each is intended for a different timeframe. As we touched on above, saving is generally better for the money you might need in the short or medium term (less than five years). Investing on the other hand, is better for the money you want to grow over the long term (five years or more).

Saving returns

You might expect the returns of saving to be quite different to the returns of investing – because investing gives your money more time to grow. While that has historically been the case, the current macroeconomic environment has given rise to higher interest rates, and has made saving more attractive as a result.

For example, here are the interest rates that Moneybox was able to offer on our savings accounts in 2022 compared to what we can offer in 2024. The reason for the difference is that the Bank of England consistently raised the base rate throughout 2023 – which increases the interest rates that banks can pass onto their customers. So, when you hear about the base rate rising, you might have more to gain than you think.

How inflation affects the value of your money

While saving can be safer than investing, if you are saving over the long term, please remember to consider the impact of inflation over time. As prices of goods continue to rise, this reduces the purchasing power of your savings over time.

So, you should always calculate your real returns (the current rate of inflation, minus the interest rate you’re earning on your savings). As an example, if inflation is at 7% and you’re earning 5% interest on your savings, you’re actually going backwards by 2%.

Investing returns

Investing returns are best looked at over the long term, usually five years as a minimum. While investing can be riskier than saving, over longer timeframes, investing returns tend to beat those of saving. And while your money is exposed to ups and downs when you invest and years in which you experience a decline can feel scary, when you zoom out and look at the bigger picture you’ll start to see a trend upwards.

The figures here are from the Moneybox Balanced Starting Option over the past five years.

¹ Bank of England

All investing should be long term (min. 5 years). The value of your investments can go up and down, and you may get back less than you invest.

Before committing to the longer term nature of investments, you should have a short-term cash supply available for emergencies.

Investment accounts have a £1 monthly subscription fee (free for your first three months). Annual platform fees of 0.45% also apply (charged monthly). Fund provider fees also apply, charged directly by the fund provider.