You’ll often find that the terms ‘investing’ and ‘saving’ are often used interchangeably, in relation to an underlying goal of accumulating wealth and securing your financial future.

However, the fact remains that investing and saving represent distinct approaches to accumulating wealth, each of which has its own pros, cons and implications from the perspective of individuals.

We’ll compare these concepts below, while asking how you can balance these two approaches effectively over time.

The Pros and Cons of Investment

We’ll start with the concept of investment, which can be simply defined as the process of allocating money or capital with the expectation of realising a positive return in the future.

Typically, investment vehicles carry a higher level of risk and reward, as while gains are exponentially higher in entities such as the forex market, there’s a more significant risk that you’ll lose disproportionate amounts over time.

For example, forex trading is an investment vehicle that’s highly leveraged, which means that you can borrow capital from a broker to open and control disproportionately large positions (often at a ratio of up to 100:1). These positions can be seamlessly controlled through platforms like the MetaTrader 4, while they deliver either sizable gains or losses depending on how the underlying market performs.

However, the investment market is far more diverse than basic savings vehicles, particularly in terms of how you commit your capital and the precise returns on offer.

This is largely good news for individuals, especially those who want to create a diversified array of investments over time and have a relatively healthy appetite for risk. However, the risk of losing more than your initial deposit may deter many people, especially those who start out with minimal capital.

The Pros and Cons of Savings

Savings vehicles certainly lack the flexibility of investment alternatives, with the majority of accounts in the UK offering minimal rates of return that hover around the 0.1% mark per annum.

However, they also provide guaranteed (albeit modest) annualised returns, which can be relied upon year-on-year and committed to a particular or generic fiscal goal.

On a similar note, there’s usually no cost to opening a savings account, while the fundamental lack of risk means that you’ll retain all of the capital used to open an account.

Some banks will also enable you to open up an account without committing any money upfront, whereas even accessible and highly leveraged investment vehicles like forex often require you to start out with a minimum amount of around $100.

Balancing Investment and Savings

As we can see, there’s a need to coordinate your overall wealth management approach, as you look to split your capital between savings and investment vehicles.

Ultimately, we’d recommend managing this split according to factors such as your age, capital holdings risk profile.

For example, younger, risk hungry individuals with a little more capital could put more of their cash into investments, whereas older and risk averse people may want to prioritise selected savings accounts.