Savings and Investments

Why are we encouraged to save money?

From childhood, most of us are told to put away money to save for the future—perhaps for something special, or maybe to be sure that when we really need something we have the funds to acquire it without taking on debt. People’s aims are broadly the same—to provide for future needs and to protect ourselves against unexpected expenditure, events and inflation.

When planning your finances, it is important to distinguish between savings and investments. Savings are generally funds that you set aside that can be accessed relatively quickly. These savings are often for a specific need or purchase, like a holiday or a new car. The most common way of saving it into a bank account (‘deposit’ account). Here, the money can be accessed in an emergency, and for every £1 you put in you will get £1 back, possibly with some interest. In other words, the original capital is guaranteed.

Investments are designed to be held for longer, usually at least five years. You need to be comfortable with tying your money up for a period of time and should not consider investments unless you have some savings in place. Most investments are not guaranteed to return your money in full, although they do offer the prospect of potentially higher returns than deposit accounts. Returns, risk and volatility are the factors that will determine a suitable place for your investments.

The value of investments may fall as well as rise. You may get back less than you originally invested.

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