This article appears as part of the Money HQ with Ben Stark newsletter.

When we talk about saving and investing, we generally think of it as setting some money aside for the future.

Go deeper into it, however, and it becomes clear we’re talking about two quite distinct activities. For example, what do we mean by the future – next week, next month, next year or indefinitely? How much are we putting aside, where does it go and what do we want from it?

The answers to these questions tell us whether we’re talking about saving or investing. And it’s important to understand the difference.

Broadly speaking, saving is about putting money aside in the short term, whether it’s for a ‘rainy day’ buffer fund or to pay for something specific, such as a holiday, car repair or work on the home. It usually entails putting money into cash accounts that can be accessed at short notice.

But while cash savings are a vital part of our resources – financial advisers recommend aiming for three to six months of ‘emergency’ money, if possible – they aren’t usually suitable for longer-term goals, not least because cash tends to lose value to inflation over time.

This is where investments come in. Investing is about setting money aside and leaving it untouched so that it can have the potential to grow into a bigger sum, benefiting from the 'snowballing' effect of compounding. It involves taking more risk with the money you put in, but the ups and downs of markets typically even out over the long term (five years or more).

What are the reasons for saving?

In its Financial Wellbeing Strategy, the Money and Pensions Service (MaPS) says: “Saving and putting aside money for later life are similar behaviours, but people can approach these tasks with different mindsets.”

Saving is very much in the here and now. It’s dictated by our current circumstances, how much we can set aside, our immediate needs and objectives.

The Herald:

“It’s about determining what the money is for,” says Tony Clark, Senior Propositions Manager at St. James's Place. “Building an emergency fund in case the washing machine breaks down means needing instant access and accepting the money is in cash and not earning a great deal.”

Circumstances have an impact as well. For example, rising inflation means many households have less disposable income available, if any. However, difficult times, such as inflationary periods and the COVID-19 pandemic, also remind us of our financial vulnerability and the importance of having a safety net.

Investing for the long term


So why do people invest? Because it’s also important to focus on ‘decades not days’ – investing for our future self rather than our present self.

“Investing also requires purpose, but the goal isn’t always clearly defined,” Tony observes. “Retirement is a good example – we don’t know the final figure we’ll need for the future, but we know it’ll happen one day.”

Sometimes there will be a particular goal in mind, such as saving for a child so they have financial resources on reaching adulthood. While putting money into a Cash ISA for 15 to 20 years might prevent you from spending it, its value will be eroded by inflation.

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Stock-market-based investments tend to produce much more growth over the long term due to the risk-reward relationship. This is the principle that by taking more risk with our money, we have the potential to receive more reward.

“Shorter term usually means not taking a risk and so saving into something more cautious or guaranteed, such as cash,” explains Tony. “For longer-term objectives, we’ll have greater risk tolerance by comparison as we have the time to recover from any volatility.”

There are several ways of ensuring you don’t take more risk than you’re comfortable with, while you can also manage risk by making sure your investments are well diversified (spread across different assets).

We can guide you through all of this and help keep your investments on track to meet your long-term objectives.

Best of both worlds


In a perfect world, most of us would be both saving for the shorter term and investing for the medium term (six months to five years) and long term.

Not only does this make sense financially, but it’s good for our wellbeing, too. According to MaPS, financial wellbeing is about feeling secure, confident and empowered, which includes knowing you can cover your short-term financial obligations while also being on track for a healthy financial future.

In other words, a combination of saving and investing can be hugely beneficial, says Tony.

“This is where speaking to an adviser comes in, as they’ll help you to understand your short, medium and longer-term goals, then consider the right balance for you between shorter-term savings needs and longer-term investment objectives.”

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

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