Saving vs. Investing: Which way should I go?
By Louisg on The Capital
I recently read an article on Medium which favoured investing over saving. The main argument was that any saved money is simply decreasing in value because of the impact of inflation. Therefore, you should invest any additional money (savings) instead to earn additional money and beat inflation. Simple.
Later that day I opened a letter which was an update on my pension. In the prior year, it had devalued by 5%. These are professional investors and it had devalued. And it made me think, actually it isn’t that simple! If you can successfully invest (i.e. make a profit) then great and maybe you will beat inflation. But making a profit is by no means guaranteed! Investing is essentially a gamble. You can argue it’s an informed gamble, you have knowledge, etc but you don’t actually know what will happen and it can be very unpredictable. A good example of this unpredictability is the UK large bank shares over the past 12 years or so. These all plummeted in 2008 and 2009 due to the financial crisis. But surely they will recover? So 2010 could be a perfect investing opportunity! Since 2010, they remained broadly flat until 2020 and then the impact of COVID-19 took its toll and they have now dropped even lower. The point here is I don’t think many (if any) were expecting that. Any investment in 2010 in such shares has now devalued. So, inflation hasn’t been beaten, and actually any investment (our savings!) is now worth less. We’ve actually lost money.
While I do agree that inflation is generally decreasing the value of savings (inflation can also decrease at times which would increase the value of savings but it's rare), I don’t think that means investment is the answer for everyone or in all circumstances. It’s really not that simple and there are lots of additional factors to consider.
Time/Freedom — To make a profit from investments it’s likely you’ll have to put the work and time in. You may need to research the various investment/trading options available (e.g. shares, funds, FX, crypto, metals, real estate… there are lots!) to improve your understanding of how they work. Then you may need to research and follow different markets, companies, currencies, etc within each investment type. And you may need to constantly monitor the market for any investment you do make. If you enjoy this sort of thing then dive right in! But to many, this is just like additional work. So really, to make additional money by investing you have to do additional work! BUT it still doesn’t guarantee you’ll make additional money and you could even make a loss! Saving doesn’t have this issue. It takes pretty much no time but you will benefit from reviewing saving rates from time to time so that you can at least earn a little interest. So really you need to ask yourself: Do I want to work more for the possibility (no guarantee!) of more money or do I want to go outside and play? :)
Flexibility — Saving can be as flexible as you like really. You can have instant access to a current account or can save for fixed periods (usually in return for higher interest rates). Investments can be less flexible. Sometimes the transactions/settlement can take time (i.e. not all are instant), particularly if via a third party like a fund manager for example. Additionally, investments can be “tied in” financially and mentally; sometimes even emotionally. By this I mean, if your investment is doing well maybe if you leave it alone (and don’t cash it in) it will do even better or, on the flip side, if your investment has devalued maybe if you leave it alone it will bounce back and besides we don’t want to cash in less than we invested so we’ll leave it.
Risk — “The value of your investments can go up as well as down.” We’ve all heard this line or something similar and it’s very true. Different investments carry varying levels of risk. Generally, the higher the risk, the higher the potential reward (profit) but of course that also means there is more risk that your investment could devalue. Are you comfortable taking that risk? Saving is virtually risk-free which is why your reward is generally lower.
Stress — Saving is stress-free. Investments can be very different and can be a bit of a roller coaster as you try to determine when to buy and sell. If you “miss out” on the price you were hoping for or don’t sell when a peak was reached that can be stressful. In addition, if your investment starts to devalue that can be very stressful as you see your hard-earned cash dwindle away.
Fees — It’s also worth mentioning that investments can carry various fees. For example, you may be charged an annual fee for fund management, a quarterly fee for a share dealing account and transaction fees/stamp duty for each trade. All of this eats into any gain you have made. So, before you actually make any profit from your investments you’ll need to cover these fees. Savings accounts don’t usually have fees so the interest you receive is all profit (subject to any local tax).
In addition to the 5 factors above there are also several good reasons to save (instead of investing):
A rainy day/emergency fund — So that you can deal with sudden changes in circumstances. For example, if your car breaks down.
A Getaway fund — This one is more about financial independence and more and more people seem to be saving these. For example, if something at your work or with your partner happens you have funds to fall back on so that you can do your own thing and maybe take some time out (i.e. you could leave your work or move out and have savings to tie you over for a few months until you know what’s next).
Deposit/large purchase — For example, saving for a deposit for a house or buying a car outright.
Avoiding debt — Buying purchases outright rather than on credit. This will help you to avoid paying high-interest rates on short term debt.
Final thoughts
Ultimately how much you should save and/or invest is a very individual decision which can depend on your financial goals, your age, and your outlook on life.
I’m not against investing at all. For me, it’s like a spectrum with saving at one end and investing at the other. Right now, I am probably somewhere near the middle with a mixture of both saving and investing suiting me best at the moment. Where you are on this spectrum is down to you and your circumstances. Do you want to put in the additional work and take that risk? Or do you want to spend that time on other things in life and minimize risk?
For those who do wish to invest, the next few years may provide some great opportunities but no one knows for sure! For those who wish to save, talk of negative interests is surfacing and already impacting some countries. This means it will actually cost you to save! As I say, it’s not that simple!
(PS: I have worked in a bank for most of my career and I have never laughed at savers!)
