Saving vs investing, explained

Should you save or invest? Today we’re comparing cash vs investing - showing you how to decide what’s best for your money, whether that’s building an emergency fund or putting your cash to work for long-term growth.

We’ll break down saving vs investing, how inflation affects your wealth, and look at examples of real historical performance of both stock markets and cash since the launch of ISAs.

The role of inflation - and why it matters

Inflation is the measure of how much prices are rising. And it quietly erodes your money’s purchasing power. If your cash isn’t earning more than inflation, its real value falls over time. Understanding the difference between savings vs investments — and how your goals and risk tolerance fit into that — can make a massive difference to your financial future.

We’re a nation of cash lovers and we know that lots of people are sitting on cash as a default, where it could be invested. Our own figures show that there are around three million people in the UK with £20,000 or more in Cash ISAs and no money invested in Stocks and Shares ISAs.

What Is Saving?

Saving means putting your money in safe places where you can easily access it, like a Cash ISA, bank account or easy-access savings account.

The benefits are that your money is secure and accessible, it is often protected by the Financial Services Compensation Scheme up to £120,000 per bank or building society and it’s a great place for short-term goals and emergencies.

The downsides are that the low returns on cash may barely beat inflation, meaning your money loses spending power over time. For example, if inflation is 3% and your savings account pays 2%, you’re effectively losing money in real terms.

When Saving Makes Sense

Cash saving is your first priority for a few things. Firstly, for your Emergency Fund, which is usually enough cash to cover three to six months of essential expenses. Secondly for your Short-Term Goals, so any money you plan to spend in the next three to five years, like on a new car, holiday or a new house. And thirdly, for any money you don’t want to take any risk with.

What Is Investing?

Investing means putting your money into assets like stocks, funds, bonds or ETFs – and for this you’d typically use a Stocks and Shares ISA or pension, or perhaps a dealing account.

The benefits of investing are numerous. There is the potential for higher long-term returns than cash. Investing also helps your money beat inflation and grow

But the downside that your money can go down as well as up, over the short term.

Cash vs Investing!

But let’s dive into the figures, to look at an actual comparison between cash saving and investing. Because history throws up some eye-opening data. Since the launch of ISAs in 1999 we looked at what would happen if you’d made a one-off investment of £1,000 when they launched and added nothing to that pot since. If you’d put it in the average cash ISA you’d have grown that money to just over £2,000. In comparison if you’d invested it in a fund focused on US markets you’d have just under £6,300 today. And if you’d put it in a fund investing globally you’d have just over £5,000, while a fund focused on the UK would have turned that £1,000 into around £3,800.

Let’s take a similar example, but look at what would have happened if you’d added £1,000 every year since 1999 when ISAs were launched. In that scenario the cash ISA would have turned your money into around £36,300 and inflation would have been just over £40,000 – so you cash hasn’t kept up with inflation.

Investing it in a global fund would have given you almost £92,500 in your pot – more than £56,000 more than the cash option. Investing in the US would have generated almost £128,000 and UK markets would have turned it into almost £68,000.

So if your plan is five or more years out, historical performance shows us that investing gives you a much higher chance of beating inflation and building real wealth.

Here’s a good rule of thumb: if your goal is less than three years you should likely save. If your goal is five or more years definitely think about investing and if your goal is three to five years, think carefully about the risk you want to take with your money and your confidence in markets.

How to get started investing

Investing can feel intimidating for first-timers, that’s totally normal. But there are a few ways to ease into it. You can start small and build up your confidence, on AJ Bell you can start from as little as £25 a month. And regular monthly contributions can take out the tricky task of trying to time the market.

You can also easily spread your money around different assets, also called diversifying. If you want help picking a fund you can check out Favourite Fund lists to narrow down the choice.

But the main thing to do is stay patient. Markets go up and down, but history favours long-term investors, and it’s best not to panic if markets do fall.

Stay patient: markets go up and down

Remember: cash has its place, but letting money sit for decades could mean missing out on growth, while investing means accepting a bit of short-term volatility for long-term potential.

If you want more tips on getting started investing, check out our investing for beginners video series, which takes you through all the steps to help you feel good investing.