Should I save or invest my money is a question asked by many people who might not understand precisely how these two different methods of stashing your cash work.

The first thing you must do is ask yourself a question;

When do I need the money?

With UK interest rates still at historically low levels, cash savings accounts will only offer a pitiful return on your savings.

If you are saving towards a short term goal, for example, a holiday in a year, then a savings account could be an excellent place to shelter your money while experiencing very modest returns.

So a Cash ISA or a High Street Bank savings account may be an option here. Just look out for withdrawal fees if you’ll want to access the money in the short term.

With cash savings, while the returns will be modest, there is no risk that the value of your savings will decrease.

However, if your goal is long term, e.g. at least five years, or ideally more than ten, then investment could have the potential to give you a better return on your money than a savings account.

Of course, this is dependent on the investment choices you pick, but broadly speaking, the more time you have, the better the chances that an investment will ride out the ups and downs of the stock market and provide decent returns.

Should I Save or Invest My Money? Here are Some Examples

Example A:

I’m going on holiday a year from now and want to save up.

A cash savings account could be a good option here. While the returns may be low, there is no danger that the value of the fund could fall. An investment for only a year could carry the genuine risk of a substantial fall in value if invested for only one year if a stock market tumble were to occur.

Example B:

I want to put some money aside for my 5-year-old grandchild to give them when they turn 21.

You have 16 years to see your money build, so in this case an investment, for example, a Stocks and Shares ISA may be something to consider. Investing your money in the stock market over this length of time should give enough time to ride out the ups and downs of the markets.

A Stocks and Shares Junior ISA may also be an appropriate consideration. However, if you are a grandparent, you will require the child’s parent or guardian to open the account.

Saving in a cash account for this length of time carries the risk of seeing modest gains being wiped out by inflation.

Example C:

I have a big wedding anniversary coming up in 5 years, and I want to save money for a unique gift

Five years is a tricky one. Any investment could go either way over this relatively short space of time. A cash savings account would probably not feel the effects of inflation over five years, but the returns would still be very modest at current interest rates.

To re-cap, investments can go down as well as up, but generally speaking, an investment has more significant potential to show strong returns over the long term than cash savings.

Also bear in mind that when it comes to cash savings, any gains made in times of low-interest rates run the risk of being eroded by inflation over the long term.

Paying attention to these general rules should mean that you know whether to save or invest and what the terms mean.

No advice has been provided here, and if you are considering an investment, it may help to talk to an adviser.