Have you ever wondered whether your money should be tucked safely in savings or put to work in investments? It’s a common savings vs investments dilemma that many face, especially with the financial landscape constantly shifting.

Balancing the need for security with the desire for growth can feel like walking a tightrope. But what if you could navigate this choice with confidence, armed with insights tailored to your unique situation?

Let’s explore five key ways to discover whether savings or investments – or a mix of both – suits your needs best, incorporating detailed UK perspectives.

Assess Your Risk Appetite – Beyond the Basics

How comfortable are you with seeing your money fluctuate in value? Understanding your risk tolerance is the first step in deciding between savings and investments. Traditionally, this involves filling out questionnaires or discussing with financial advisors, who then gauge your comfort with the ups and downs of the market.

However, in the UK, there’s more to this story. The Financial Conduct Authority (FCA) insists that advisors conduct comprehensive risk assessments before recommending any investment products. This ensures that your choices align with your true risk appetite, not just a theoretical one. But why stop there? Consider going a step further with ‘behavioural’ risk profiling tools, now being pioneered by some UK fintech firms.

These tools analyse your past financial decisions, offering a clearer picture of your real tolerance for risk rather than what you think it might be. It’s about understanding yourself financially, not just ticking boxes.

Align Your Financial Goals with Your Timeline

Is your goal just around the corner or decades away? The timeline for your financial goals is a major factor in deciding between savings and investments. Traditionally, short-term goals, like saving for a house deposit, are best served by savings. Meanwhile, long-term objectives, such as retirement, might benefit more from the growth potential of investments.

In the UK, the Help to Buy ISA scheme underscores the importance of saving for specific goals, like purchasing your first home. But your timeline isn’t just about financial milestones. Life events like a planned career break or early retirement can shift your investment horizon. Even if your age suggests you have time, your personal plans might call for a different strategy. 

It’s about being flexible and realistic, ensuring your financial plan adapts as life changes.

Compare Inflation with Interest Rates – And Consider Your Personal Inflation

Inflation can be a silent eroder of savings. If your savings interest rate doesn’t keep up with inflation, the real value of your money decreases over time. This is why investments, which often outpace inflation, can be appealing. In the UK, the Bank of England aims to keep inflation around 2%.

But here’s the twist: don’t just rely on the national inflation rate. Consider your ‘personal inflation’ – the price changes of the goods and services you actually use. Your personal inflation rate might differ from the national average, affecting how you should approach savings and investments. Understanding this nuance can help you protect your purchasing power more effectively.

Make the Most of Tax Efficiency

Nobody likes paying more tax than necessary. In the UK, ISAs (Individual Savings Accounts) are a popular way to grow your investments or savings tax-free. For the 2023/24 tax year, the annual ISA allowance is £20,000. Using this allowance can significantly enhance your long-term returns by shielding your earnings from tax.

But there’s another layer to consider: ‘tax-loss harvesting‘. If you have investments outside of an ISA that have lost value, selling them can offset gains from other profitable investments, reducing your capital gains tax bill.

This strategy requires a more active approach to investing, but it can be a savvy move for those looking to maximise their tax efficiency.

Build a Hybrid Emergency Fund

Before you even think about investing, having an emergency fund is crucial. Typically, it’s advised to have 3-6 months’ worth of living expenses in a savings account that’s easily accessible. This provides a financial cushion in case of unexpected events like job loss or medical emergencies.

In the UK, the Money Advice Service (now MoneyHelper) recommends building this fund as a cornerstone of financial stability. But why not take it a step further? Consider a ‘hybrid’ emergency fund. While keeping a portion in a standard savings account, you could also explore options like Premium Bonds for the rest.

Premium Bonds offer a chance to win tax-free prizes, giving your emergency fund an extra edge without sacrificing accessibility. It’s about making your safety network a bit harder for you.

Your 5 Next Steps

1. Assess Your True Risk Appetite: Go beyond basic questionnaires and explore behavioural profiling tools to understand your real tolerance for risk.
2. Reevaluate Your Financial Timeline: Align your savings and investments not just with financial goals, but with life events and personal plans.
3. Monitor Inflation Closely: Keep an eye on both national inflation rates and your personal inflation to ensure your money retains its value.
4. Maximise Tax Efficiency: Use your ISA allowance and consider advanced strategies like tax-loss harvesting to enhance your returns.
5. Build a Hybrid Emergency Fund: Create a flexible emergency fund that balances easy access with the potential for tax-free gains through Premium Bonds.

By following these steps, you’ll be well on your way to making informed, confident decisions about whether savings or investments – or a combination of both – are right for you. The key is to tailor your approach to your personal circumstances, ensuring that your money works as hard for you as possible.