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 is into a bank account (‘deposit’ account) where the money can be accessed in an emergency, and for every £1 you put in, you will get £1 back and possibly some interest. In other words, the original capital is guaranteed.

Investments are designed to be held for a longer term, usually at least 5 years. You need to be comfortable with tying up this money 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 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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Investing and Risk

Whether you are looking at investing in a pension, an investment bond or ISA (Individual Savings Account), you might consider using investment funds. A fund is capital belonging to numerous investors, held in one place and used to collectively purchase securities, while each investor retains ownership and control of his own shares. Buying large numbers of shares or achieving a portfolio of investments may well be beyond most average investors so they effectively club together to increase their purchasing power. 

Typically, these pools of money are run and managed by an investment specialist. The manager is paid to make the day-to-day decisions of where the pooled money is invested. The fund manager uses their expertise to make suitable investment decisions in order for the value of the pooled fund to hopefully grow over time. 

Another advantage of pooled investment is being able to diversify.

Investment Options

All these types of investment are available through your financial adviser. You may be able to include your investment within a tax-efficient product such as an ISA (Individual Savings Account) or a pension. There is a vast array of products available, and choosing the most suitable one can be difficult, your adviser will be able to help you decide which are suitable for you.

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