Money Basics: When to save and when to invest

Personal finance can be a confusing and bewildering space sometimes. Some people may be telling you to get your act together and start saving – others will be preaching the power and importance of investing.

 
But which one is more important to you in your specific circumstances? Many factors should influence your decision here – age, responsibilities, commitments, lifestyle and ambitions are just a few key elements. In this article, we will break down the question at hand to give you a real indication of what you should be doing with your money.
 

Should you be doing neither?

 
Before we discuss when you should be looking to save or invest, you first need to ensure that you are in a financial position to do so. If you have any debts, particularly those with high interest, you should look to pay these off before you start putting money away or investing.

Why? Because the longer you have these debts, the more interest you’ll have to pay and thus you’ll be paying more than you need to in the long run – money that could be used down the line to bolster your savings or investment portfolio.

If you have no high-interest or short to medium-term debts then you can look at saving and investing.
 

When to save

 
We’re brought up to believe that saving is for the future, and while it is technically, saving should actually be used as a short to medium-term strategy. This could be anything between 1-5 years, where you’re saving for big milestones like a house deposit, holiday, wedding or a trip of a lifetime.

A general rule of thumb is that if you’re going to need the cash in the next five years or so then you should be saving it, rather than investing. There are many different types of savings accounts, from cash ISAs that are tax-efficient options to regular and easy-access savings accounts.

Another reason to save is to build up an emergency fund which is widely considered a good way to secure financial stability. This creates a safety barrier in case you need to pay any unexpected or emergency bills.
 

When to invest

 
On the other hand, investing should be a long-term strategy for most ordinary people. Once you’ve established your financial base of an emergency fund and savings for any short to medium-term ambitions, you can look to invest your surplus with a view to the future.

Investing is often pooled into the same category as trading by people that don’t understand it, but this is a separate process altogether, and a more time-consuming and risky one at that. Investing is potentially a really good way to generate passive income and build your wealth over time thanks to compound interest.

The longer you invest in stocks and shares or index funds and don’t withdraw (most people would argue 10 or 20 plus years) the greater the returns you can generate on your investments which can

be reinvested to generate further returns – compound interest can be your best friend if you play the long game.