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

As interest rates rise, savers will be pleased to see they can finally earn a decent amount of interest on their cash and may be asking themselves if they should save in cash or invest.

Some savings accounts are offering more than 5% interest for customers prepared to lock up their money for several years.

But even if you switch your cash into a high-interest account, saving your money is no match for inflation – currently running at 10.1%. 

While keeping your money in a bank or building society account may feel safe or low risk, its value is being constantly eroded by the high cost of living.

In comparison, investing your cash stands a better chance of keeping up with inflation. 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”.

We put the two approaches – savings vs investing – to the test to see which one is a better option for your money.

Should you put cash into a savings account?

Saving your money should always be commended, and is a great way to help you achieve your goals in life, like buying a new car, or getting on the housing ladder. By saving some of your cash each month, it means you’re building a buffer so you have money at hand should something unexpected happen, like the boiler breaking down, or you suddenly lose some of your income. 

As a rule of thumb, we should all aim to save at least three months’ worth of essential outgoings as an emergency buffer – 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 summer holiday and the cost of Christmas. 

How much money can I make by saving?

Savings rates have continued to tick up this year, following repeated rate rises by the Bank of England. The Bank is expected to raise interest rates again on 3 November, potentially by a hefty 0.75 percentage points to hit 3%, marking a 33-year high.

After years of rock-bottom interest rates, savers are finally enjoying some generous returns on their cash. 

According to the data analyst Moneyfacts, the average easy-access account now pays 1.14%. But you could get 2.3% on your savings by shopping around and switching to the best easy-access account – see our article on the best savings accounts for the latest interest rates for your cash.

Savings rates have increased across the board during October – the average one-year fixed rate is 3.31% (a month ago it was 2.73%), the average two-year fix is 3.64% (3.01% a month ago), and the average five-year fix is 4.03% (3.4%). 

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”.

Some regular saver accounts, where you deposit money every month, pay more than 5%. To find out the best savings rates right now, check out our guide to the top savings accounts.

Can saving my money beat inflation?

In a word, no. There are no accounts that pay more than the current rate of inflation, which is running at an eye-watering 10.1%.

Springall notes: “Inflation is still very much eroding the true spending power of savers’ cash.”

While you may be pleased to be earning interest on your cash, and your savings balance may be increasing every time interest is paid, the real value – the spending power – of your money is actually losing value.

If you saved £1,000, and let’s say inflation fell slightly and averaged at 8% over the next year, the buying power of your money would fall to £926 after a year, due to the effect of inflation. After five years it would drop to just £681. After a decade it would be worth £463.

Can investing beat inflation?

There are no guarantees with investing. You could lose money if you sell a share for less than you paid for it. You could also see your money go down in value if the fund you invest in sees negative returns.

However, if you’re investing for the long term, there is more time to recover from any losses. Investing nearly always does better than keeping your money in a cash account over the long term, meaning you have a better chance of matching – or beating – inflation. 

According to some long-running research called the Barclays Equity Gilt Study, UK shares have beaten cash in 90% of five-year periods since 1899.

So, if you’re happy to take some risk with your money and invest it, aim for at least five years if you can.

Is investing better than savings?

Data from the Association of Investment Companies and Morningstar further supports this, showing how cash may beat investing over shorter time frames, but investing your money can produce much bigger returns over longer time periods.

Saving £1,000 in a cash account paying an interest rate of 2% would have grown to £1,020 after a year. That same £1,000 invested in global markets - taking the average return from the Global AIC sector - would have shrunk to £676 over the past year due to a downturn in the stock markets. 

However, investing the money over the past five years would have swelled to £1,479, while keeping the money in cash would have only grown to £1,104. After a decade, the investment would now be worth a huge £3,613, compared to just £1,219 if you’d kept the money in a savings account.

Why should I invest?

Investing has the power to make your money work harder over the long term. If you’re saving up to go on a skiing holiday this winter, or are trying to build up an emergency buffer, then keep your money in a savings account.

But if you are happy to tie your money up for several years and understand that there are no guarantees with investing, but that you could make better returns compared to keeping it in a savings account, then investing might be the right option. 

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 (think different asset classes, different geographic regions). This will help smooth out any returns; in other words, if 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 vehicle to build up an emergency cash buffer for unexpected expenses. 
• 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 types of 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.

Cons

• There are no savings accounts that currently 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 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.

Remember to get your tickets for the MoneyWeek Wealth Summit hosted by Merryn Somerset Webb, on 25 November 2022! – we’ve got some brilliant speakers lined up and, given everything that’s going on, we’ll have an awful lot to talk about.

Book your place now at moneyweekwealthsummit.co.uk