Many people are not really sure what the difference is between investing and saving and whether one is better than the other. It is a good idea to make sure that you do know what they are and then you will be able to make the right decision for you.
What is Investing
Investing is when you use your money to buy something that you hope will increase in value. This can be anything but commonly it will be a house, shares in a company or antiques and art. There is a risk with an investment. That when you come to sell the item that you have bought, that you will find that it is worth less than you bought it for and you lose money. There is also a chance that it will have increased in value massively and you will be able to make a lot of money from it. Therefore, there is an element of risk, where you will not be sure whether you are going to end up getting more or less than you paid for the item. The longer you hold the investment, the more likely it is to increase in value. You will also find that the investment may need to be quite a significant amount of money in order for you to be able to invest in it. Despite the risk though, returns on investments tend to be relatively high compared to savings accounts.
What are Savings
Savings are very different to investments. You will put your money into an account and then you will be paid interest on it. When you want to withdraw (or can withdraw) the money you will get back everything that you put in plus any interest that is due to you as well. Savings accounts do vary, like investments do. You can have an instant access account and get your money out right away, but that will not pay very much in interest. There are other accounts where you might be paid more. For example, you can use a notice account where you will have to give a certain amount of days notice before withdrawing and the interest will be higher. You can also buy a bond and you will have to keep it for a certain time period and at the end you will paid interest at a comparatively high rate. However, despite having this choice savings accounts will pay a lot less than investments on average.
So, deciding which is best is not an easy task. An investment can be a bit of a gamble, where you can potentially get more money back but you will need to be prepared to lose the money. It is therefore often said that we should only invest money that we are prepared to lose. It is also key to keep the money invested for a long time. This is because we will want to make sure that we overcome any natural fluctuations in price. If you keep the money invested for a short time, it may go down in value or is unlikely to go up very much. Often investments will need to be kept for at least ten years if not longer, in order to see a significant increase in value.
You will have to decide whether you have money that you can afford to lose and that you are prepared to keep tied up for a long time. If you do, then an investment could be the answer. However, you will need to think about whether you are happy to invest or whether you would rather keep your money safely in a savings account.