“Savings” and “investments” might seem similar but in fact they’re very different and hard to compare.
"Savings" grow in line with current interest rates - which have been very low for years.
“Investments” grow through increases in the underlying asset prices and the reinvestment of dividends.
Inflation can reduce the buying power of your money, making investments a better choice if you’re okay with risk.
Please note, the information presented in this page is for illustrative purposes only and does not constitute tax advice or recommendations.
Negative real interest rates, where the interest rate is lower than inflation, have been with us for much of the last decade. So if you have been a cash saver since 2010 then you are likely to have seen the real value of your cash fall as inflation has outpaced interest rates. It is impossible to predict the future, however few predict a significant rise in interest rates in the near future.
But investing opens up the possibility of growth that actually outpaces inflation, and gains real value over time. It is not guaranteed to do this of course – nothing is guaranteed in the world of investments – but it is fair to describe it as a ‘reasonable expectation over the long term’.
This encapsulates what investing is all about, accepting the level of risk that is appropriate for your circumstances in order to try and reach your financial goals. Avoiding all risk means limiting the possibility of growth, and in periods of ultra-low interest rates, such as the current one, it means seeing your cash savings reduce in purchasing power. It's all about striking the right balance.
The point to remember is that even a modest investment, with modest growth projection, can grow to become something quite substantial in time thanks to the effect of compounding (watch our video below!). Sticking your money under a metaphorical mattress might feel reassuring but it may not grow your wealth to meet your financial objectives. At the very least, do the maths and consider the risk vs reward equation.
It's the easy way to understand all the financial stuff you feel you should know but somehow missed.