Your feedback is essential to help us improve - click here to take our 3 minute survey.

Should I save or invest?

Should I save or invest?
Image source: Getty Images

Should you save or invest? Both saving and investing have their own place in a well-planned financial strategy. Which one you choose to pursue at any point in your life depends on both your goals and your current circumstances.

Even if you’ve been saving for a while, at some point you should have enough money stockpiled to test the market.

Here’s the how, when and why of both options and how to decide which one is right for you.

Choosing the right time

Ideally, it should never be a choice between one or the other. Done well, saving and investing can both get you closer to your goals in different but connected ways.

When to save

In all cases, saving money should always come before investing. Until you have an emergency fund in place, 100% of any money you put aside should go straight into a savings account. Savings will get you through tough times and make sure you don’t incur debt if you suddenly lose your job.

Experts say you should have three months’ worth of living expenses saved in an emergency fund, though more would be better if you have big monthly expenses.

Other times when saving is most important:

  • If you’re about to lose your job and want a bigger emergency fund.
  • When you’re pregnant. Babies are expensive and it doesn’t hurt to be prepared.
  • If you expect to need a large amount of money within a short period of time (five years or less). Examples include a down payment for a house, paying for an expensive wedding or university tuition, or covering the cost of a major holiday.
  • If you own a business. You should continue saving even after you start investing. Liquid assets – like cash in the bank – will allow you to take advantage of investment opportunities as they come up.

When to invest

For long-term goals, investing is a better strategy as it pays better, according to The Money Advice Service.

The right time to invest:

  • As soon as possible after you have your emergency fund in place. If you plan to save for your retirement, the earlier you start, the better. Start investing at 20 and you could be a millionaire long before retirement age, but wait until you’re 40 and your chances of reaching that amount are much lower.
  • If you’re committed to investing your money and not touching it for at least five years. Ten years is even better.
  • If you can weather the ups and downs of the market. Investing is always risky. The market usually goes back up even after the worst recession, but it can take some time for that to happen.

What percentage of my portfolio should be in cash? 

There’s no one-size-fits-all when it comes to the best saving and investing strategy. 

According to Investopedia, you should be saving between 10% and 15% of your annual income. But if your goals are big, you might need to save a lot more than that. And if those goals are long term, you should be investing rather than saving.

This is because the average savings account has interest rates of 1% or less, but the average annual rate of return in the stock market is 6.5%. So the more ambitious your financial plans are, the more reasons to invest rather than save.

Rated 5 stars out of 5 by The Motley Fool UK

Trade UK shares for just £2.95 and US shares for just $3.95 — with no platform fee!

The FinecoBank* Multi-Currency Trading Account offers UK investors highly competitive share-dealing rates across 26 global markets. Open your account using promo code TRD500-ML and during your first 3 months you can trade without incurring commission charges – up to a total commission amount of £500. (Terms and conditions apply.)

*Affiliate Partner. Important information and risk disclaimer: The value of shares and any income produced can fall as well as rise, and you may get back less than you invest. Exchange rate fluctuations can reduce the sterling value of any overseas holdings.

Was this article helpful?

Some offers on The Motley Fool UK site are from our partners — it’s how we make money and keep this site going. But does that impact our ratings? Nope. Our commitment is to you. If a product isn’t any good, our rating will reflect that, or we won’t list it at all. Also, while we aim to feature the best products available, we do not review every product on the market. Learn more here. The statements above are The Motley Fool’s alone and have not been provided or endorsed by bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard, and Tesco.