What Does This Money Need to Do?
Investing is often associated with making your money work harder, while saving can sound like the less ambitious option. But potential return is only one part of deciding where your money belongs.
A more useful starting question is:
What does this particular money need to do before you use it?
If you need £15,000 for a known expense next year, for example, protecting your ability to access roughly that amount at the right time may matter considerably more than pursuing an uncertain additional return.
If the money is intended for something much further into the future and you have flexibility over when it will eventually be used, accepting changes in its value may be easier to accommodate.
This is where the distinction between saving and investing becomes practical.
Our guide to Saving vs Investing: What’s the Difference? explains how the two differ in areas such as stability, potential returns, access and risk. Here, the focus is specifically on when the characteristics of saving may be better suited to the job your money needs to do.
There is no universal timeframe or financial milestone that produces the same answer for everyone.
Instead, three questions are particularly useful:
When might you need the money?
Can that date change if necessary?
What would happen to your plans if the money were worth less when you needed it?
When Can Saving Make More Sense?
Saving can make more sense when your priority is not maximising the potential return from your money, but having it available in roughly the amount you expect when you need it.
That tends to become more important as a financial goal gets closer or when the money may need to be accessed without much warning.
When Saving Can Become More Important
The right choice depends on the job your money needs to do. These circumstances can make stability or accessibility particularly valuable.
You may need the money relatively soon
The less time you have before the money is required, the fewer options you may have if an investment happens to fall in value shortly beforehand.
The deadline cannot easily move
If a payment or purchase must happen around a particular date, waiting for an investment to potentially recover may not be realistic.
You may need unexpected access
Money intended to provide financial flexibility may need to be available without having to consider what investment markets are doing at the time.
A fall could disrupt the goal
If having less money available would prevent or materially change the planned purchase or payment, preserving the amount can become more important than pursuing additional potential growth.
These factors are connected, but they are not identical.
You could have a goal that is several years away but cannot realistically be postponed. Alternatively, you could have a relatively near-term goal that you would be comfortable delaying if necessary.
That is why timeframe alone cannot make the decision for you.
You also need to consider what would happen if the value of your money changed at an inconvenient time.
Why Does the Date You Need the Money Matter?
Investment markets do not move according to your financial plans.
An investment does not know that your house purchase is completing next month, that a tuition payment is due in September or that you have reached the date of another financial goal.
Its value can be higher or lower when that date arrives.
This matters because the eventual outcome of an investment may be less relevant if you need to withdraw the money before that outcome has had time to develop.
Suppose you have £20,000 intended for a house deposit and expect to need the full amount in 18 months.
Imagine that the money is invested and its value falls by 20% shortly before you are ready to use it.
This illustrative example shows why the timing of a financial goal can matter when money is exposed to investment fluctuations. This example is illustrative only. A 20% fall is not a forecast, and actual investment values can rise or fall by different amounts.What If the Money Falls in Value Before You Need It?
The important issue is not simply that the investment has fallen.
It is the interaction between the fall and the deadline.
If you could postpone the purchase, you might choose to leave the investment alone. Its value could subsequently rise or fall further, but you would at least have flexibility over when to sell.
If the £20,000 has to be available now, waiting may not be an option.
You could instead need to find another £4,000, reduce the amount available for the deposit, postpone the purchase if possible or sell the investment at its lower value.
Your capacity to wait can therefore matter just as much as your willingness to accept investment risk.
Someone may be perfectly comfortable seeing investments rise and fall but still have a financial goal that gives them very little flexibility when those fluctuations occur.
Is There a Timeframe When You Should Always Save?
There is no universal number of years that automatically means money should be saved rather than invested.
You may come across rules of thumb that use a particular timeframe as the dividing line between the two.
These can provide a simple reference point, but they cannot account for what the money is for or how flexible your plans are.
Consider two people who both expect to need £10,000 in three years.
A Flexible Three-Year Goal
The first person would prefer to use the money in three years but could postpone the goal if the amount available happened to be lower than expected.
A Fixed Three-Year Goal
The second person needs £10,000 for a payment due in three years and would have little or no ability to postpone it if the money were worth less.
The timeframe is identical, but the consequences of an investment fall are different. Timeframe and flexibility are therefore more useful when considered together.
As the date gets closer, there is generally less time available to respond to changing investment values.
But that does not mean reaching a particular number of years automatically makes saving correct.
A longer timeframe does not automatically make investing correct either.
You still need to consider:
- whether the date can change;
- whether you need a particular amount;
- what would happen if you had less;
- whether you might need access earlier than planned.
The dedicated guide to Investment Time Horizon looks more closely at how the amount of time you expect to remain invested can affect the risks you face.
What If You Do Not Know Exactly When You Will Need the Money?
Not every financial goal has a fixed date.
You might be building money towards moving home, changing career, starting a business or another future expense without knowing precisely when it will happen.
In that situation, it can be useful to consider the earliest realistic point at which you might need the money, rather than only the ideal or latest date.
Suppose you hope to move home in five years but know that circumstances could make a move realistic in two years.
The fact that five years is your preferred timeframe does not remove the possibility that you could need access sooner.
That uncertainty is relevant when deciding what job the money needs to perform.
You can also separate money rather than forcing your entire balance into one decision.
Money that might be needed sooner can have a different job from money genuinely intended for a much more distant goal.
This is one reason saving and investing do not need to be treated as an all-or-nothing choice.
Does Saving Mean Giving Up Potential Returns?
Potentially.
One reason people consider investing is the possibility of achieving greater growth over longer periods than they might receive from cash savings.
But higher potential returns come with greater uncertainty.
With a savings account, interest rates can vary and account conditions differ, but your cash balance does not normally move up and down because financial markets have risen or fallen.
Investments work differently.
There is no equivalent predictable investment return. An investment might rise substantially, grow slowly, remain around the same value or fall. The outcome is uncertain.
That uncertainty can be acceptable when it fits the purpose and timeframe of the money.
But the highest potential return is not always the most important objective.
Imagine you already have the full amount required for an important expense 12 months from now.
Your main objective may no longer be:
How can I make this money grow as much as possible?
It may instead be:
How can I make sure approximately this amount is available when the payment is due?
Those are different financial jobs.
The most appropriate place for money is therefore not necessarily the one offering the highest potential return. It is the one whose characteristics best match what you need that money to do.
Saving still involves trade-offs.
Interest rates can change, some savings accounts place restrictions on access and inflation can reduce what cash can buy over time.
This becomes increasingly relevant when money is held for longer periods. How Inflation Affects Savings explains why maintaining a stable cash balance does not necessarily mean maintaining the same purchasing power.
The decision is therefore not simply:
safe, low-return savings versus risky, high-return investing.
It is a trade-off involving stability, accessibility, potential return, uncertainty and time.
What If Your Goal Is Several Years Away?
As the amount of time before you need the money increases, the decision can become less clear-cut.
Greater time can give you more flexibility to experience periods when investment values fall and potentially recover.
That is one reason investing is generally associated with longer-term goals.
But reaching a particular number of years does not automatically turn investing into the better choice.
Suppose two people are both building money towards goals ten years away.
The first person’s goal is flexible. If necessary, they could postpone it, reduce the amount required or change their plans.
The second person expects to need a particular amount at a relatively fixed point and would have much less ability to adjust.
Both have a ten-year timeframe, but they do not necessarily have the same capacity to deal with an uncertain outcome.
Potential investment growth becomes more relevant as money genuinely takes on a longer-term role, but so do the consequences of the investment being worth less than expected when it is eventually needed.
That is why time helps create flexibility, but time alone does not make the decision.
If the money is also part of the financial buffer you may need for unexpected expenses, that creates another consideration. How Much Emergency Savings Should You Have? explains how to think about money specifically intended to provide that protection.
Can the Right Choice Change as Your Goal Gets Closer?
Yes.
The job your money needs to perform today may not be identical to the job it needs to perform several years from now.
A goal that is ten years away today will eventually be five years away, then two years away and eventually only a few months away.
As the date approaches, the consequences of having less money available can become more immediate.
How the Priorities of a Financial Goal Can Change
A long-term financial goal can gradually become a near-term one. That can change which characteristics matter most.
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The goal begins in the distance
When the money will not be needed for many years, there may be greater flexibility over short-term changes in its value.
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Time passes
The goal gradually becomes closer, reducing the amount of time available before the money may need to be used.
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The consequences of a fall become more immediate
A lower value matters more when there is less opportunity to postpone the goal or wait through changing market conditions.
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Your priorities may change
Potential growth may become less important relative to stability or knowing approximately how much money will be available.
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Reconsider what the money needs to do
The appropriate balance can be reviewed as the timeframe, goal and your ability to deal with an uncertain outcome change.
There is no mandatory point at which invested money must automatically become savings. The important point is that the characteristics you need from the money can change as the goal approaches.
This does not mean there is a fixed date when investments must automatically be sold and moved into savings.
Nor does an entire pot of money necessarily need to perform exactly the same job.
Different parts may have different timeframes or purposes.
The important principle is that the save-versus-invest decision can be revisited rather than treated as a permanent choice made at the beginning of a financial goal.
How Can You Decide Whether to Save or Invest This Money?
Rather than starting with the potential return from saving or investing, start with the job of the money.
This framework does not produce a universal answer.
Instead, it helps explain why two people with similar amounts of money and similar timeframes can reasonably reach different conclusions.
It also helps separate this decision from another question: whether you have enough accessible savings elsewhere before committing additional money to investments.
If that is the question you are now considering, Should You Save Before You Start Investing? looks specifically at how an accessible financial buffer and longer-term investments can fit alongside each other.
Conclusion
Saving can make more sense than investing when the job of your money depends heavily on stability, accessibility or having a particular amount available at a particular time.
The decision is not simply about which option offers the highest potential return.
Consider when you may need the money, whether that date can change, how much of the amount needs to be preserved and what would happen to your plans if its value fell before you needed it.
A longer timeframe can give you more flexibility, but there is no universal number of years that automatically makes investing appropriate. Equally, choosing savings for a particular goal does not mean investing is unsuitable generally.
The useful question remains:
What does this money need to do?
Once that is clear, the differences between saving and investing become much more meaningful.
