Many people confuse saving with investing. However, the two are fundamentally different, both in their methods and their associated risks.
Saving is primarily a means of preserving existing capital. In its most basic form, it is the sock under the mattress. Of course, most savers hope that their money will grow thanks to interest payments. Essentially, interest is a bank’s way of paying savers for lending their money to the financial institution. However, interest payments do not always work in the saver’s favour, particularly if inflation outstrips interest rates. This means that it is entirely possible that a pot of money in a regular savings account will end up being worth less in real terms in the future – and this is why many people choose to invest at least some of their money.
Investing money means placing a sum into an investment vehicle for a certain period of time. This necessarily involves a greater potential risk than saving the same amount. That said, although no investment can guarantee a profit or that the capital itself will not be eroded, it is the potential returns that attract investors.
Savvy savers and investors can reduce the risks and improve their chances of making a profit. When it comes to choosing a savings account, it is important to compare the interest rates offered by different providers. Higher rates are often available to potential savers with larger deposits and those who are prepared to commit their money to a savings account for a minimum period of time.
Investors have even more choice. There are many different types of investment (or asset classes) – and cash is only one of them. Other popular types are shares, bonds, property and commodities. Some investments, notably government bonds, tend to be lower risk than others. Capacity and appetite for risk is a personal matter, but many investors choose to spread their risk by diversifying, which means investing in different asset classes.