Saving vs Investing: what's right for you?

Whether to save your money or invest it is one of the most important decisions you’ll make with your finances. And it can have a huge impact on your future wealth. This guide breaks down the key differences between saving and investing, explains the risks and rewards of each, and helps you figure out which path (or mix of both) is right for your financial goals.

You may have heard investing is ‘risky’ and the cash is ‘safe’ but the reality isn’t quite that clear cut. For many people, holding their savings in a bank or building society account reflects their modest risk appetite. And that’s okay. 

But the fact is if interest rates are lower than the rate of inflation the value of that cash is slowly eroding. Inflation is the increase in price of goods and services over time. As inflation rises, you are able to buy less with the money you have.  

The balance in your savings account may look like it’s slowly increasing, but it won’t buy you the same amount of goods if prices rise faster. In other words, the real value of your cash decreases.

What is saving?

Cash has the big advantage of relative safety. Your money is usually protected by deposit insurance (in the UK this is the FSCS, which protects deposits in bank accounts up to £85,000),  and you can be pretty sure how much is going to be in your savings account day to day. 

But for that security and safety, you sacrifice the opportunity to grow your savings above the rate offered by your bank or building society.

What is investing?

Investors expose their cash to the financial markets through buying shares in companies, bonds, funds, or other investments. Risk and volatility are the price you pay for the hopeful long-term outperformance of your investments over cash.

Investing is about time in the market, not timing the market. Reinvesting the gains from your investments, ‘interest on interest’, can significantly accelerate the growth of your investments over time. Giving your investments the runway to build up that all-important compounding effect means investing is a long-term game. Timing the market may seem tempting but even the most seasoned investors will caution against such folly. You have been warned. 

Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn't, pays it.

– attributed to Albert Einstein (yes, really)

Building interest on interest may not sound particularly sexy, but the longer you leave your investments, the better. That’s the good news. The fact is the value of your investments may go down as well as up. It’s the risk you take when it comes to investing, but the rewards can be far greater than just letting your cash chill in a savings account.

Let’s see how this could work out in a hypothetical example where we compare the growth of £1000 at 5% (a conservative annual rate of return for stocks) with the growth of £1000 at 1% (a figure to represent the average interest on cash savings). 

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It’s important to remember that returns on investments are never this smooth. Some years will be better than others. But, with time and patience, investors can give themselves a big advantage to build wealth. 

Safety vs growth potential

In the decade or so following the 2008 global financial crisis (GFC) interest rates in the UK hovered near zero. This was bad news for savers. As recently as March 2020, the base rate was 0.1%, having been cut in response to the economic stress of the COVID-19 pandemic. But the era of low interest rates is now well and truly over. 

The Bank of England began raising interest rates in January 2022 to help reduce spending (by encouraging saving), cool the economy, and drive down rampant inflation. As of July 2025, the Bank has set interest rates at 4.25%, down from the peak, but still well above levels seen over the last decade

While savers can now expect interest to accrue on their cash, investing still can offer greater returns. That is, if you’re willing to shoulder some risk.  

Investing time horizons and goals

There is no substitute for time and that’s why when it comes to investing a good rule of thumb is to adopt a five-year mindset. If you’re going to invest, you want to be comfortable setting the cash aside for five years. That is enough time to let firms demonstrate their ability to create value and for you to see what sort of dividend consistency a firm has. 

Savings lend themselves better to financial goals that are more immediate and have a shorter timeframe. Markets are inherently volatile and the last thing you want is to be forced to pull your money during a dip. 

Retirement is something we should all be thinking about when it comes to financial goals. Smaller, regular pension contributions you make in your 20s, 30s and beyond, can really multiply later on thanks to the magic of compounding. Get cracking! Your older self will thank you.

Practical Guidelines

1. Pay off any unsecured, highest-interest debt first, including credit cards 

That compounding effect that Einstein loved? That can also amplify your debt. As valuable as compound interest is for your savings, it is just as damaging when it is working against you.

Student loans won’t affect your credit rating if you’re applying for the likes of a mortgage but they will clearly affect your overall ability to pay that mortgage. As the amount owed is written off after 25 to 30 years from the first date you were due to start repayments, it’s more helpful to consider the monthly hit to your spending as a graduate tax.

2. Build an emergency fund

It’s wise to keep three to six months’ worth of your salary as a safety net before you start investing. Once you have a safety net, the next step is to decide how much of the cash you are putting aside each month should go into your investments, and how much into savings. 

3. Pay your future self 

As soon as you get paid, put some money away. Saving first, rather than last, makes it a priority and means you’re much more likely to save money rather than spend it.‍

A useful way to think about how much to save is to keep 50% of your income for necessities, like housing and bills, 30% for your lifestyle, like eating out, and 20% for financial goals, like saving for retirement. You can tweak the 50/30/20 mantra to suit aggressive savings targets or other commitments but it serves as a useful guide‍.

4. Invest like a machine

Concentrate on investing periodically. Don’t be tempted to try to time the lowest entry points. Rough guides like ‘put 10% of your pay cheque’ into your savings risk being too broad. That might not be sustainable given your financial commitments or it may be far too low, given your financial goals. Start early and add steadily and consistently to your investments.

5. Look to yourself before the assets

Your tolerance for risk, your time horizon, and ultimate financial goals are what will decide the mix of assets you put in your portfolio. Hash these out before picking investments. Stick to the plan during downturns. Especially during downturns!

6. Be a tax savvy investor 

Make sure you are investing in the right account. An Individual Savings Account (ISA) or Self-Invested Personal Pension (SIPP) will shield your savings from capital gains and dividends taxes.

7. Diversify, diversify, diversify 

Let’s talk eggs and baskets. Nobody on God’s green Earth knows which assets, geography or sector will lead the pack at any given time, so portfolio diversification is key. It’s all about having a squad of investments ready to take over from one another over the long term.

How do I get started?

For those with low risk tolerances and imminent financial goals, saving might be the best choice. For those with long-term goals and the ability to tolerate market volatility, investing is the way. But combining saving and investing balances liquidity and growth. Consider this blended approach to meet your financial goals.  

‍We think investing should be open to everyone. Our investment platform makes it simple for beginners and experienced investors. And costs are low. You can buy and sell shares commission-free and take advantage of fractional shares (where you buy a part of a share). 

Freetrade offers a whole universe of assets to invest in, including US, UK, and European stocks and shares, investment trusts, ETFs, gilts, treasury bills (for the lower risk appetites) and mutual funds (for those wanting to have their money managed by a professional).

If that reads like a foreign language, you might like our beginner’s guide to the stock market. We also have a resource hub for investing in the stock market to get a wider view of investing in general.

What’s the right account for you?

With a stocks and shares ISA (you might hear it called an investment ISA too), you can invest up to £20,000 a year and won't have to pay capital gains tax (CGT) on any gains your investments make inside the ISA account. You also won’t pay UK tax on dividends or interest income, although some non-UK shares may still be subject to withholding tax on dividends. This can be particularly useful for any goals you have up until retirement.

For those retirement-focused savings and investments, a self-invested personal pension (SIPP) account might be more suitable. You can use a  SIPP to bring together loose pensions from previous employers into one place. 

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Important information