Savings and investments
What's the difference and what are the options?
The terms saving and investment are often used interchangeably, largely because both are things that we do with our spare money. But other than a few products like fixed-term saving bonds and ISAs, this is the only similarity. So what is the difference?
Saving is putting cash away, in a bank account or the proverbial jam jar, so that we are covered for the emergencies life can throw at us, like losing our job, or needing to replace the car. With savings accounts, you'll usually get back the amount you put in plus a bit extra in interest, unless the bank or building society collapses. In this case, as long as the bank or building society is regulated by the Financial Services Authority (FSA), you may be able to claim compensation through the Financial Services Compensation Scheme (FSCS). This means it's a low-risk way to store your spare cash. And this risk is the key difference between saving and investment products.
Investing carries the risk that you may not get back what you put in. Depending on the type of investment you're looking at, this risk will vary. But as investments are a medium to longer term place to put your money, the risk can be balanced by the potential return.
Which is right for you?
The answer to this will depend largely on your attitude to risk. But in reality, the answer for most people is a mixture of both but not necessarily in equal measure.
It's a good financial habit to save regularly as it allows you to stay in control of your cash, making you less likely to run up large debts. But if you have a lump sum you can tie up for longer an investment could make your money work a lot harder. But only if you're prepared to take a risk.