Saving vs investing: which is better to help you make more money?

Savings rates are on the decline. After years of poor returns, 2023 saw savers benefit from much more eye-catching rates as providers competed to win our cash. 

Successive increases to the bank base rate by the Bank of England, as it tried to get inflation under control, resulted in some of the highest interest rates on offer from savings deals in more than a decade.

However, things are now moving in the other direction, with significant cuts to the rates of interest on offer, as a result of the expectation that base rate has now peaked and will only fall from this point. 

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According to data from Moneyfacts, the average rate on one-year fixed rate bonds fell for a third consecutive month between December and January to 4.87%, the biggest month-on-month fall since February 2009. Average rates for longer-term fixed rate bonds also dropped at the fastest rate in 15 years.

Product choice has also dropped, as providers have opted to withdraw the number of options on offer to savers. 

As a result, if you’re opting for an easy access account right now you can get a high of 5.20% from Ulster Bank, while opting to fix for a year means you can get around the same rate from the likes of ICICI Bank and Hampshire Trust Bank.

Given the cuts to savings interest rates, does investing your cash give you a better chance of beating inflation especially as the cost of living measure remains high? But of course, this involves taking some risk. As investment advert disclaimers always say: “the value of your investment can go down as well as up”.

Should you put cash into a savings account?

Saving your money, however you do it, should always be commended.

It is a great way to help achieve your goals in life - after all, we all need cash savings for short-term or even emergency money. 

Rather than letting your spare cash waste away in your current account, it makes sense that it should earn something regardless of inflation. 

As a rule of thumb, we should all aim to save at least three months’ worth of essential outgoings as an emergency buffer. This could cover unexpected costs such as a leak or car repairs – keep it somewhere where you can withdraw the money quickly if needed, like an easy-access savings account.

You can also use your savings to pay for big-ticket items throughout the year, like a much-needed summer holiday and the cost of Christmas. But what about long-term savings? What is the best way to make your money grow?

How much money can I make by saving?

Savings rates increased significantly last year, following repeated rate rises by the Bank of England. It now stands at 5.25%, its highest level since 2008, though the Bank of England has opted to freeze base rate at its last few meetings.

With inflation seemingly on the decline now, despite its surprise increase last month, the expectation is that base rate has now peaked and will only fall from this point. 

As a result, while savers are enjoying more generous returns on their cash than has been the norm in recent years, it’s important to move quickly if you want to get the best possible rate, particularly if you have savings inertia and haven’t moved your money around in a while.

Rachel Springall, finance expert at Moneyfacts, calls savings accounts a “traditional haven for consumers,” especially fixed-rate accounts, which “provide a clear guaranteed return for investors during unprecedented times of uncertainty.”

Can saving my money beat inflation?

Technically yes, but there have been very few occasions during the past 50 years where real interest rates have been positive (where interest rates on savings accounts exceed the rate of inflation). 

Even though interest rates on savings are higher than they have been for some time, inflation is still eroding the true spending power of your cash.

The latest inflation figures show the cost of living measure increased marginally from 3.9% to 4% in December.

As a result, while there are some savings accounts that offer an inflation-beating return, you have fewer options than a month ago when providers were more competitive.

Can investing beat inflation?

Cash will always have a place for short-term needs, but shares have historically outperformed over the long-term.

The trouble is that humans do not always behave rationally when it comes to money, says Joshua Gerstler, chartered financial planner at The Orchard Practice.

“Despite the fact that history shows us that equities have always performed better than cash in the long run, we do not always act upon and learn from this,” he says.

“We see banks as safe because they are banks but actually the value of our money is going down because inflation is going up."

Is investing better than savings?

Keeping your money in cash may feel safer amid the economic uncertainty.

But with inflation remaining stubbornly higher than the Bank of England’s targets, you need to be active in shopping around in order to find an account paying an inflation-beating return on your cash savings.

Analysis by comparison website Finder last year suggested the average UK savings account has lost £4,047 in “real term” value over the past 10 years due to high inflation. 

Its research showed that the average saver in the UK has approximately £17,773 in cash and if the savings rates had risen in line with inflation over the past 10 years this would now be worth £23,333. 

However, the high inflation we’ve seen in recent years means this figure is actually more than £4,000 lower, with the real value sitting at just £19,286.

Why should I invest?

Savers aren’t to blame for not investing enough.

Gary Bush, financial adviser at MortgageShop.com suggests there isn’t enough emphasis on savings beyond the growth in our properties but investment providers don’t help with high minimum investment requirements.

One issue is that many savers also just don’t know where to start.

“There are new ways to make investing easier, like using ready-made investments offered through high-street banks and robo-advisers,” says Stuart Crispe, of financial services directory Sunny Avenue.

“Still, some financial advisers only work with one company, limiting choices. If you go directly to an adviser, you may find the fees too high for your level of experience.

Kalpana Fitzpatrick, senior digital editor of MoneyWeek and author of Invest Now: The Simple Guide to Boosting Your Finances, says: "Cash savings are important and we should all have savings accounts as part of our emergency buffer and to pay for short-term goals. But remember, cash savings have their limitations – often with limited deals in terms of how much you can save and how long for. So, investing is essential if you are looking to build future wealth.” 

How should I invest?

As well as investing for the long term, you should also aim to build a diversified portfolio that includes different asset classes, different geographic regions. This will help smooth out any returns; in other words, if an asset such as gold isn’t performing well, shares might be doing well, or if the UK stockmarket has taken a tumble, America’s listed companies may be faring better.

Fitzpatrick says: “If you're already investing, keep putting a small amount into your portfolio each month – being consistent means you can smooth out the ups and downs in the market, known as pound cost averaging.

"If you're just starting out, the stockmarket may understandably look a bit scary, but remember, investment growth can take years and though you may not see instant gratification like you do with cash savings accounts, over the long term, investments almost always do better than cash savings."

Savings pros and cons

Pros

• An easy-access savings account is a useful way to build up an emergency cash buffer that can support you when it comes to unexpected expenses such as home or car repairs. 
• If you want a fixed return on your savings – and are happy to tie up your money for at least a year – a fixed-rate account will give you this certainty.
• There are lots of different savings accounts, whether you want easy access, a fixed rate, a regular saver, or a cash Isa where you are guaranteed not to pay a penny in tax on the interest.
• If you’re saving for short-term goals, keeping your money in cash is likely to be more appropriate than investing it.
• If you can’t bear the idea of your money ever going down in value (even if it later reverses those losses and makes a healthy gain), a savings account is the lowest-risk option out there.
• Savings accounts are easy to open, with most available online and you can usually choose your own without the need of a financial adviser. 

Cons

• Only a minority of savings accounts beat inflation.
• There can be restrictions on how much you can save in a bank or building society account, penalties for withdrawing your money, and the best rates may be reserved for existing customers.
• To get the best rate, you need to be constantly comparing rates and be prepared to switch, which can become a time-consuming hassle.
• If you’re saving for the long term, there’s a good chance you’ll get a lower return compared to if you invested the money instead.

Investing pros and cons

Pros

• Investing for at least five years is highly likely to net you a bigger return in comparison to keeping the money in cash.
• Investing can help you build your wealth and reach your long-term goals in life faster. It could also help you keep pace with and even beat inflation.
• There are lots of different ways to invest, from buying shares to investing in a fund. You can also shelter your money from tax using a stocks and shares Isa or personal pension.
• You can keep costs down by using a low-cost platform or app to invest, and by choosing tracker funds such as exchange traded funds.
• You can either invest for growth, income (such as being paid dividends), or a mix of both. Being a shareholder in a company may also get you some perks and freebies.

Cons

• Investing involves risk. Your money could fall in value. It also could go up and down repeatedly during periods of high volatility.
• Investing is not free. There will be fees to pay, and possibly tax too (such as stamp duty when buying shares, and tax on any gains if not holding the investments in an Isa or pension).
• You will need to choose and monitor your investments. This may be time-consuming if you’re picking funds and shares yourself. You can reduce the time and hassle by using a financial adviser or a low-cost robo-adviser to create an investment portfolio for you.