Savings or Investments – Which is Best for You?

by Les Roberts on 16 Feb, 2011

Annual income twenty pounds, annual expenditure nineteen, nineteen and six, result happiness.

Annual income twenty pounds, annual expenditure twenty pounds, nought and six, result misery.
Wilkins Micawber – David Copperfield (1850) by Charles Dickens

Written by Charles Dickens in 1850 the Micawber Principle still rings true as the one golden rule of saving and investing. In fact, the idea that your income must always amount to more than your expenditure is the one golden rule of successfully managing your money. And, whilst this may seem like common sense, it’s staggering just how many people are prepared to live beyond their means in our credit-reliant society.

But if you are in a position to put money aside at the end of each month are you better off saving your money, where there is minimal risk and a chance to earn interest, or better off investing your money, where there is greater risk but also the potential for a greater return?

If you have enough money to put aside then you may want to hedge your bets and split your money between savings accounts and investments. This means that you can put some of your money into a savings account offered by a bank or building society and be guaranteed to get back at least the money you paid in as well as the interest rate you were given when you took out the account. You can then invest the rest, in bonds for argument’s sake, whereby you loan money to a company or the government and get paid a certain amount of interest but risk their value falling as they are traded on the stock market. The flip side to this is that you can make a greater return if their value rises.

Or you may wish to invest your money into a Cash ISA which you can then transfer into a Stocks & Shares ISA at a later date should you wish to do so. The benefit of doing this is that any interest you make on the money you put into your cash ISA is tax-free as is any capital growth and dividends you receive if you invest in a Stocks & Shares ISA. A major benefit of investing in this way is that you can transfer money from a Cash ISA into a Stocks & Shares ISA without affecting the investment’s tax status or your annual allowance.

The downside to investing in an ISA is that you are limited to the amount of money that you can invest, though this limit is set to rise in line with the Retail Price Index (RPI) at the start of the new financial year on April 6th 2011. The current limit is set at £10,200 per year, all of which can be invested in a Stocks & Shares ISA but only half of that amount (£5,100) can be invested into a cash ISA. The new financial year will see those limits rise to a total annual allowance of £10,680 with the cash ISA allowance rising to £5,340.

But before you invest it’s important to consider exactly what you are saving for, for example, do you have a short-term aim, such as saving for a summer holiday, or a long-term goal such as a retirement plan? If you are in the former bracket and you can’t risk a fall in value on your capital then it’s best to stick to a Cash ISA. But if you are in it for the long haul and can cope with the vagaries of the market, or you simply have more than £5,100 to invest, then a Stocks & Shares ISA could be the way to go.

But no matter how much money you have to put into savings or investments, or for how long you wish to keep that money tied up, it’s always a good idea to seek professional financial advice before making a commitment.
Picture by wwarby on Flickr.

About the Author

Les Roberts


Les Roberts has been a freelance journalist for over ten years specialising in lifestyle, football, music, fashion and art. He also works for moneysupermarket.com, the UK's leading comparison website as a video and content writer. Follow Les on Twitter @LesRobertsMSM