Contemplating personal finance options? Here is our introductory guide to saving and investing. Choosing the right strategy is key to maximising your financial health.
Saving is typically defined as preserving one’s wealth instead of spending it. Opening an easy-access bank account offers savers certain short-term advantages over perhaps no more than three years, prioritising liquidity and potential emergencies by storing cash and accumulating interest in a safe facility. Saving is a useful way of allocating funds to a particular goal, such as a wedding or a new home deposit.
Under the Financial Services Compensation Scheme (FSCS), savings of £120,000 or under are protected in the event of the bank going out of business. Does that mean saving is risk-free? Not necessarily. Interest rates can fluctuate, meaning a potentially lower return on your money. If inflation is higher, your purchasing power is weakened when savings fail to keep up with rising living costs.
Some people with cash may instead opt to invest their money in say the stock market which offers investors the opportunity to buy a stake in a listed company, or ready-made investment funds managed on your behalf. People who invest are exposed to a different level of market risk. The aim is usually longer term, perhaps five years or more, building wealth to say finance school fees or retirement plans. This allows investments more time to recover following market downturns.
Investing carries a higher risk than saving because a portfolio’s value reflects market behaviour. A higher risk strategy offers the potential for greater financial rewards than a savings account, leveraging compounding interest, but equally you might end up with less than you put in.
Given this set of competing pressures, some people might instead opt for a hybrid approach, building short term spending and emergency funds with savings accounts, whilst allocating surplus cash to five-year investments. In this way, you can maximise your growth potential.
If you are investment planning in Oswestry or Cheshire, call our team at Hartey Wealth Management now to set up a consultation.
