1.1 The difference between saving and investing
Before you start to look at savings and investment products, there are some important definitions that need to be made clear.
People often use the terms ‘saving’ and ‘investing’ as well as ‘savings’ and ‘investments’ interchangeably. They may also use the term ‘saving up’ when talking about the way money is placed in a range of different products, albeit with the common objective of building up a sum of money over time.
Yet there is a clear distinction between these terms.
- Saving up. This was covered in the previous section, and is the putting of money aside to use at a future date for an array of possible purposes.
- Savings products or savings accounts. These are simple products where you save money with a bank, building society or credit union, and you are paid interest. Crucially, other than for very large savers, the value of the capital (the amount you originally save) is not at risk if it is saved with a UK-regulated financial institution.
- Investment products. Here, there is risk but also possible greater rewards than with a savings account. With an investment, the value of your cash can subsequently go up and down depending on the performance of your investment. That is not necessarily a bad thing, but you need to understand that your capital is at risk.
Now watch the video to learn more about the differences between savings and investments and the various reasons for doing both.
Download this video clip.Video player: Video 2 The difference between saving and investing
Transcript: Video 2 The difference between saving and investing
NARRATOR
Putting money aside to use in the future can be done by putting money in a savings account or by investing it in shares, bonds, or other types of investments. When you save or invest, you’re deciding not to spend money today. You’re making the choice to defer consumption today in favour of consumption in the future. There are several reasons you do this.
You may simply be building up a rainy-day fund to cover for life’s uncertainties, such as the cost of car repairs or a replacement washing machine. You may be building up a fund to cover a specific forthcoming event, such as the cost of a wedding or a holiday. You may be planning for the long-term by building up a fund to provide money in the future, say, when you retire. You may be building up money to pass on to your children. It is, though, essential to understand that savings and investments are different.
When you put money into savings accounts, in almost all cases, your money is not at risk. You will always get back at least the amount of money you place into an account. In addition, your savings will earn interest, which is normally added to your account each year. There’s an array of savings accounts you can choose from. Some offer a variable interest rate, which can move up or down over time, and you can usually access the money whenever you want from these accounts. Other accounts have a fixed rate, where the interest paid stays the time for the term, but you will often only be allowed to access your money at the end of the savings term.
We look at these various savings products in this session. They all share one feature though. Any money you place in them is currently protected up to 85,000 pounds per person per UK regulated financial institution.
When you put your money into investments, such as shares, there is the risk that you will not get back all your money when you sell the investments. This is because the price of investments goes up and down over time. So why would you want to put money into investments given the risks involved? Explaining this means understanding the relationship between risk and return.
When you put money into investments, it’s because you’re hoping for a better return than the interest rate you receive on savings accounts. The higher expected return is the reward for taking on risk. This expected return is not guaranteed. Only time will tell whether a decision to invest paid off.
If you do put your money into investments, you should not plan to take your money out in the short-term. Investments are for the long-term, and over a longer time period, there’s a greater likelihood that you can ride out those periods when their value falls. The way most of us invest is done indirectly through our pension funds or life-insurance funds. We look at these funds in this session and at the types of assets that the funds invest in, such as shares, company bonds, property and commodities.
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Video _unit6.2.1 Video 2 The difference between saving and investing
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