Stop Just Saving, Start Investing: Why Your Money Needs to Work Harder

^{Disclaimer: This article is not financial advice and is shared for educational purposes only.}

We've all heard the saying: "Save, save, save!" While saving is undoubtedly important, especially for short-term goals and emergencies, it's not enough to build long-term wealth. In today's economic climate, simply putting money away in a savings account can actually mean losing purchasing power over time. This is where the power of investing comes in.

The Inflation impact

Inflation, that sneaky force that makes your groceries more expensive each year, is a major reason why saving alone falls short. Let's say you save £1,000. If inflation is at 3%, in a year, that £1,000 will only buy you what £970 could buy today. Your money's buying power has decreased, even though the nominal amount stayed the same. Traditional savings accounts often offer interest rates that barely keep pace with, or even fall behind, inflation. This means your savings are slowly but surely losing value.

Interest Rates: The Other Side of the Coin

Interest rates play a crucial role. While high interest rates on savings accounts might seem appealing, they often rise in response to higher inflation. So, even if you’re earning more interest, the increased cost of goods and services can negate those gains.

Investing: Making Your Money Work for You

Investing, unlike saving, is about putting your money to work. It involves allocating your funds to assets that have the potential to grow in value over time. These can include stocks (ownership in companies), bonds (loans to governments or corporations), real estate, or other assets.

A Practical Example:

Imagine you have £5,000.

• Scenario 1: Saving: You put it in a savings account with a 2% annual interest rate. After one year, you'll have £5,100. However, if inflation is 3%, your real return is actually negative – your money buys less than it did initially.

• Scenario 2: Investing: You invest in a diversified portfolio of stocks and bonds. Let's assume a modest average annual return of 7% (this is a hypothetical example and not a guarantee). After one year, your investment could be worth £5,350. Even after accounting for 3% inflation, you've still increased your purchasing power. Over longer periods, the difference becomes even more significant due to the magic of compounding.

Why Investing is Crucial for Long-Term Goals:

Whether you’re saving for retirement, a deposit on a house, your children's education, or simply financial freedom, investing is essential to reach these goals. It allows your money to grow at a rate that outpaces inflation, preserving and increasing your purchasing power over time.

Getting Started

Investing can seem daunting, but it doesn't have to be. Start by educating yourself. Read books, follow reputable financial websites, and consider working with a financial advisor to create a personalised investment plan that aligns with your goals and risk tolerance. Even small amounts invested consistently can make a big difference over the long run.

Saving is important, but it's only one piece of the financial puzzle. To truly build wealth and achieve your long-term financial goals, you need to embrace the power of investing. Don't let your money sit idle – make it work for you!

To learn more, join this upcoming free Stock market investing for beginners workshop on the 28th of February 2025 designed to help with educational tools in building your knowledge about stock market basics.