The Difference Between Saving and Investing

Saving and investing are often blurred together as a single concept. Both involve putting cash to work to grow over the long term, so it’s easy to see why the two are confused. However, once you look under the hood, their definitions couldn’t be more different. At Financial Expert, we believe that investing will result in meaningful growth in your wealth over the long term. Merely saving in a bank account will result in little or no additional spending power at the time you come to collect your savings. In this article, we’ll explain all of the differences between saving and investing. It’s one of the most comprehensive saving v investing articles available on the web. 

Difference Between Saving and Investing
The differences between saving and investing are quite stark

In this article when we talk about saving, we mean placing cash into a cash savings account to earn a % interest rate. When we talk about investing, we mean opening an account with a UK stockbroker and buying shares.

Saving versus investing: a summary table

DurationAny periodLong term
RiskLow riskModerate to high risk
Inflation protectionNot likely to keep pace with inflationLikely to exceed the pace of inflation
Choice of types of saving/investmentFew productsLarge range of products
Financial advice needed?UnlikelyFinancial advice may be needed
Chance of loss of capitalVery low likelihood (particularly if <£85k saved)The real possibility of a loss of capital, particularly in the short term
Level of feesLow feesLow to high fees depending on product
Potential stressLow stressLow to high stress depending on risk tolerance and suitability of investments
Expected returns0 % – 2% returns per year3% – 7% per year
Suitable forShort term savings goalsLong term savings goals
Sharia-compliantDefault savings accounts are not compliantEquity investments are generally sharia compliant
Wealth strategyPreserving wealthGrowing wealth
Income strategyLow, stable incomeHigher, variable income

Differences between saving and investing: in detail


Saving is a sensible way to tuck away a few pounds a month to spend at Christmas, it’s also the way that many choose to save for retirement. It’s a very flexible approach that is theoretically suitable for long and short savings periods.

Investing on the other hand, is not well suited for short term savings objectives. This is because the value of an investment portfolio will rise and fall on a daily basis. Over short periods of time, there is a real possibility that your account value could be worth less than what you put in.

If you are merely trying to save a few months of disposable income to pay for a holiday, wedding, or similar, you will probably not want to take this risk of a fall in the value of your investments. Practically speaking, a fall of sufficient size may require you to continue to save for longer than originally anticipated to ensure that you reach your saving goal.

Over very long term periods, the risk of investment losses reduces considerably.


Here’s the simplest explanation of risk: It’s the chance an outcome will differ from your expectation.

Savings accounts have virtually no risk because you are contractually promised a given interest rate over your savings period. This means that you can predict with confidence how your savings will grow over time. Furthermore, even if your UK bank collapses, £85,000 of your savings should be protected by the FSCS.

Investments have the opposite behaviour. The value of shares and corporate bonds will rise and fall over time in an unpredictable fashion which is known as the ‘random walk of the markets’. Over a period of a couple of days, an individual share has a 50:50 chance of rising or falling.

This makes holding investments a very different experience to holding a savings account. A savings account is essentially static, whereas an investment account is constantly in a state of flux.

Inflation protection

General price inflation is the gradual increase in prices that we observe year on year. It’s the reason why you remember the prices of chocolate bars, crisps and magazines being much cheaper when you were younger.

Inflation is generally caused by two factors:

  1. Things may get become more expensive to make, particularly if the manufacturing process or service deliver involves plenty of manual labour in an economy with rising wages. Book ‘The Inflation Myth’ points out that many items actually get cheaper and higher quality over time, but some goods & services are the exception.
  2. The total supply of money in an economy has increased at a faster rate than the amount of goods and services produced. This means that a greater sum of money is chasing the same quantity of goods and services, meaning that people will generally be prepared to pay more to secure those items

The Bank of England targets a stable inflation rate of about 2% per year. However, as the best economics books will explain, inflation cannot be precisely controlled, and therefore it actually tends to fluctuate between 0% and 4% annually.

Savings accounts do not pay a high enough rate of interest to allow your savings to grow fast enough to keep pace with inflation.

If you saved £100 for a year, and the inflation rate was 3%, then an item that cost £100 at the start of the year may cost £103 at the end of the year. However, if the interest rate on the account is only 1%, then you’ll end the year with insufficient money to buy that item. Rather than your savings growing in real terms, you’ve actually lost spending power!

The expected return of asset classes such as shares, corporate bonds and property are higher than a bank account, and thankfully they’re also higher than the inflation target. This means that a well-invested investment portfolio should have more spending power after a long period of investment than when you started.

Choice of type of savings / investment

How many different types of savings products are there, really?

There are three:

  1. Fixed interest rate for a fixed period, often known as a ‘savings bond’
  2. Fixed interest rate for a temporary period, before the rate reverts to a variable rate
  3. Variable interest rate for an indefinite period

How many different kinds of investment are there?

There are many distinct categories of investment:

  1. Equity – the ownership of a company
  2. Debt – a receivable owed by a company
  3. Property – physical assets including land
  4. Derivatives – a contract with another party
  5. Commodities – Practical, tangible goods used for multiple purposes
  6. Currencies & cryptocurrencies – Means of exchange
  7. UK Hedge funds – traders who attempt to generate profits from trading
  8. Collectables – valuable items you hope will appreciate in value

However, within each of these investment types are a number of very distinct ways to invest. Taking equities for example, there are countless ways to get access to returns based on the ownership of a company

This will hopefully give you a picture of how vast and complex the world of investments can be. It needn’t be complicated, because you may only need one or two good funds to invest in to build a robust portfolio. However, the dizzying array of choices can be intimidating.

Income strategy

For savers looking for a concrete income, saving in a bank account may be their only option. The interest from a savings account is guaranteed (over the agreed period) and therefore savers can rely upon that regular income.

The downside is that interest rates are very low, therefore you will need an impressive pot of savings to produce a meaningful income.

For example, £100,000 saved at a 1.5% interest rate could produce £1,500 of income per year. That’s just over £100 per month – a very low income relative to the massive chunk of savings in the bank.

In contrast with an investment portfolio, you can tailor your investments to generate a 3% – 5% yield (mostly through dividend investing). At a 5% yield, £100,000 of investments could produce £5,000 of income each year, which is a far more useful £416 per month.

You can even attempt to invest for an 8% yield! However, the downside to these attractive income levels is that the income is at risk and not guaranteed. If companies encounter a period of poor performance, their CEO and Board may decide to cut the dividend to preserve cash.