Your money sits in two main places – savings accounts and investments. Each serves a different purpose in your financial life.
Savings keep your money safe and ready to use. Investments give your money a chance to grow.
Most people need both, working together, to build financial security.
The balance between saving and investing shapes your financial future, but it changes as you move through life. What works in your twenties might not work in your fifties.
Understanding both approaches helps you make better financial decisions, and that’s what this blog is about.
Understanding savings
Savings, in most cases, is the cash you keep in regular bank or building society accounts and cash ISAs, places where you know it’s secure and you can get to it when you need it.
Some accounts let you dip in whenever you want, handy for everyday life or unexpected costs. Others pay you a bit more interest if you leave your money untouched for a while.
Savings are perfect for money you’ll need soon, or for that ‘just-in-case’ fund everyone should have. The interest you earn depends mainly on what the Bank of England does with its base rate. When that goes up or down, savings rates usually – although not always – follow.
The beauty of savings is you know exactly what you’ve got. Unlike investments, your £1,000 in savings will still be £1,000 next month.
But there’s a catch. Inflation can quietly eat away at your money’s real value. If prices rise faster than your savings grow, your money will gradually lose its purchasing power. That’s why savings work better for short-term needs than long-term growth.
But don’t underestimate the peace of mind that comes with having savings. There’s something reassuring about knowing you’ve got money tucked away that you can count on in an emergency. It helps you sleep better at night and often helps you make smarter decisions about your longer-term finances, knowing you’ve got a safety net in place if you need it. Sometimes, that feeling of security is worth more than the potential returns you could earn by investing.
Understanding investments
Investing means putting money into assets that could grow in value. These include shares in companies, bonds, property and investment funds. Unlike savings, investments can fall or rise in value. This uncertainty creates both opportunity and risk.
Investment returns come in two forms: capital growth and income. Capital growth means the value of your investment increases. Income comes from dividends, interest or rent. Both types of returns can help you build wealth over time.
The relationship between risk and return shapes your investment decisions. Higher potential returns typically mean higher risks. Lower risks usually mean lower potential returns. Time plays a crucial role – longer investment periods often smooth out short-term market movements.
Compound returns make investing particularly effective over long periods. Your returns earn their own returns, creating a snowball effect. This compounding becomes more powerful the longer you invest.
The importance of emergency savings
Emergency savings form the foundation of financial security. You can use this money to cover unexpected costs or income gaps. Without emergency savings, you might need to sell your investments at poor times or take on debt.
Building an emergency fund should take priority over investing when you’re starting out. Start small and add regularly. Once you have adequate emergency savings, you can focus on longer-term investment goals.
The size of your emergency fund will depend on your circumstances. Consider your job security, health, family responsibilities and monthly expenses. Keep your emergency money in an easy-access savings account, so you can get to it quickly when needed.
Regularly reviewing your emergency fund is essential. Life events might mean you need more or less set aside. Significant expenses, income changes or family responsibilities can all affect your needs.
Setting financial goals
Your financial goals will help you determine whether to save or invest.
Short-term goals, like saving for a house deposit or planning a wedding, need certainty and accessibility. You’ll want your money in savings where you know exactly how much you have. Medium-term goals, such as saving to start a business or funding a career break, might use a mix of savings and investments to balance security with growth. Long-term goals, like planning for retirement or building a child’s university fund, usually benefit from investment growth potential as you have time to ride out market fluctuations.
Your goal timeframes matter more than the goals themselves. Shorter timeframes suit savings because market volatility could disrupt your plans. Longer timeframes suit investments because you have time to recover from market drops.
Different goals can need different approaches. You might save for some goals while investing for others. Regular review with a financial adviser helps ensure your strategy matches your goals.
Your personal values will also influence your goals. Some people prioritise security over growth. Others focus on building wealth for future generations.
Understanding your priorities will help you shape your strategy.
Finding the right balance
Finding the right mix of savings and investments is personal to you.
Your age matters. If you’re younger, you’ve got more time to recover from any investment losses. If you’re closer to retirement, you might want to play it safer.
Your job makes a difference, too. A stable career might mean you’re comfortable keeping less in emergency savings, while if you have an irregular income, you might want a bigger safety net.
So, think about where you’re at in your life right now.
In your twenties or thirties? You can probably afford to be bolder with investments, giving your money more chance to grow over time.
Approaching retirement? You might want to dial back the risk and keep more in savings. After all, you’ve worked hard for that money, so you’ll want to protect it.
Keep checking that your strategy still works for you. Significant changes in your life, like having a baby or changing jobs, might mean you need to rethink things. The ups and downs of investment markets might also throw your carefully planned mix out of balance.
Everyone’s different when it comes to risk, even people who seem similar on paper.
Maybe you’re comfortable watching your investments rise and fall, knowing they should grow over time? Or perhaps you lose sleep at the thought of your money dropping in value? In that case, keeping more in savings might help you sleep better.
There’s no right or wrong here – it’s about what works for you.
Common mistakes to avoid
People often get stuck at extremes with their money. Some keep everything in savings accounts, watching their money lose value to inflation when it could be growing through investments. Others go too far the other way, taking big risks with money they might need next year. The trick is finding a middle ground that works for you.
Think of it like not putting all your eggs in one basket. Spreading your money across different types of investments – maybe some shares, some bonds, some property – means you’re not gambling everything on one thing going well. If one area hits a rough patch, the others might help balance things out.
Also, watch out for fees eating into your returns. Whether it’s savings account charges or investment management costs, they all add up. Over years or decades, even small fees can take a big chunk out of your money. It’s worth spending time understanding what you’re paying and looking for better deals.
Money decisions can get emotional. When markets drop, it’s tempting to panic and sell everything – usually at the wrong time. When everything’s going up, it’s easy to get carried away and take risks you shouldn’t. Having a clear plan written down helps you stay on track when emotions are running high. Working with a professional financial adviser can help you see things more clearly so you can make the best choices based on data, evidence and their insight, rather than emotions or hunches.
How can Glenrose Financial Planners help?
Savings and investments are like different tools in your financial toolbox. You need both to build a secure future. Your savings are there for when you need quick access to money, like a rainy day fund. Your investments work harder in the background, helping your money grow over the years.
Getting it right isn’t about copying what your friends or family do. It’s about doing what makes sense for you. Your financial plan should reflect your life, not someone else’s.
That’s where Glenrose can help. Through consultation, we’ll work with you to fully understand your current financial position and compare this to where you want to be. We’ll then provide quality, independent investment advice and practical pathways to help you to achieve your goals. And we’ll take care of all the necessary final steps to turn your plan into a reality, with regular reviews to keep things on track should your circumstances change.
To make a start, book an online meeting with one of our advisers to discuss your investment goals and learn how we can help.