Save or invest: Getting the balance right?

Person doing calculations

Often individuals are caught between two minds on whether to save or invest and if so what amounts to allocate to each. To help answer this key question, defining savings and investments and its respective purpose may help.

Simply put, savings is money you have left over from your income after covering your regular expenditures like rent, food etc. For example, if a person earns £2,000 per month and their expenditure is £1,500, then the difference of £500 is what they have saved for the month. Some of the most common things we save for are things like, holidays, car purchase, deposit for a home, emergency purchases such breakdown of your fridge or boiler. Savings are placed in a bank account, where the original amount is safe and is readily accessible based on the account type you select. Although cash doesn’t go down in value, but the real value of cash may depreciate due to inflation.

So, what is investment? Investment is essentially money taken from your savings for growth by buying things that increase in value, for example, property, shares and similar assets. Investing in property and shares are riskier than a deposit account, this is because the value of property or shares can go up or down and hence the value that you invest changes. But with risk comes potential reward – on average over the long term investing in property and stock market produces a higher investment return than a deposit account. Moreover, it beats the inflation rate! Given the risks involved, generally individuals looking to invest in stock market should look to invest for a minimum period of five years. Investments may be effective for those looking to invest over the long term, for example, a 30 year old investing regularly for retirement years or an 18 year old investing regularly to buy a house in 10 years time or a parent investing lump sum &/or regular amounts for a five year old’s university education in the future.

Savings options

The first thing one should do is to build an emergency fund, so that you have enough money to meet your day to day needs in the event that something unexpected happens. The general rule is to have three months’ worth of living expenses saved up in a readily accessible bank account, for example a current account. However, it’s prudent to have six months’ worth of living expenses as savings.

Any amount over and above your emergency fund can be saved effectively using a mixture of fixed term and/or notice accounts to maximise your return on savings. For example, any amount you do not need for one year may be saved in 1-year fixed term account, likewise the amount not needed for two years may be saved in a 2-year fixed term account and so on. A summary of Sharia compliant savings accounts available to consider are as follows:

Fixed Term Savings Accounts

NameExpected profit rateMinimum depositBank name
Al Rayan Fixed 2 Year2.30%£1,000Al Rayan bank
BLME Fixed 2 Year2.25%£1,000BLME
Gatehouse Fixed 2 Year2.15%£1,000Gatehouse bank
BLME Fixed 1 Year2.00%£1,000BLME
Al Rayan Fixed 1 Year2.05%£1,000Al Rayan bank
Gatehouse Fixed 1 Year1.90%£1,000Gatehouse bank
UBL Fixed 1 Year0.60%£2,000UBL
UBL Fixed 6 Months0.15%£2,000UBL

Notice Accounts

NameExpected profit rateMin investment Notice periodBank name
Gatehouse 120 Day Notice1.82%£1,000120 daysGatehouse bank
Gatehouse 95 Day Notice1.75%£1,00095 daysGatehouse bank
BLME1.70%£10,00090 daysBLME
Al Rayan 90 Day Notice1.50%£25090 daysAl Rayan bank
Gatehouse 60 Day Notice1.00%£1,00060 daysGatehouse bank
Gatehouse 31 Day Notice1.30%£1,00031 daysGatehouse bank
Al Rayan 60 Day Notice1%£25060 daysAl Rayan bank
UBL 90 Day Notice1.00%£2,00090 daysUBL

Note: the information on the accounts should not be taken as personal recommendation. Please do contact the relevant bank to learn more about the accounts and whether these are suitable for your individual circumstances. The information shared may vary, please confirm complete details with the banks.

Investment options

Individuals who do not need their capital for five years or more may wish to consider investing in a portfolio of stock market based investments like shares, funds, ETFs and property investments. It’s worth noting that each investment type has different risk/return profile. For example, it may be riskier to invest in a small company listed on AIM market than a blue-chip company. Therefore, it’s important to understand each investment type, asset class and the associated risks before investing. So investing does require one to have a reasonable knowledge of investments, particularly when you make your own investment decisions.

Amongst other factors, when deciding how to invest, you need to consider your risk tolerance. In simple terms, this is how much money you can afford to lose in the short term, and how long you can wait before achieving positive returns. It defines how much room you have to manoeuvre, and is a key factor in most investment decisions. The market is in constant flux which is what contributes towards investments rising and yielding good returns on your money. This means that it can also fall, which could result in some loss of capital. However, over the longer term you are more likely to see an increase, which is why time is an important factor in this decision.

So, what’s the right balance of savings and investments?

The right answer to this question all depends on your individual circumstances, objectives and your risk profile. In general, the most optimum solution may be to have a combination of savings and investments to ensure that you can cater for your short-term financial needs, whilst not losing sight of your long-term financial goals. It’s important to keep things simply by having a clear understanding of your short term and long term goals and then save or invest the capital accordingly.

How can we help with investing?

At Simply Ethical, we have devised our proposition to service clients regardless of their personal wealth, investment amount or whether they require financial advice or not. For those who are seeking a low cost online investment advice, our Simplified Advice Online service could help meet their investment needs. Simplified Advice Online is a low-cost online investment advice service which asks you a number of questions to understand your objectives and risk profile to then allocate you to a suitable portfolio of investments that are managed by us. Whilst for those with complex needs or those who are interested in seeking comprehensive financial advice our Personal Financial Advice service helps them achieve their objectives.

Please note, nothing in this article should be taken as advice or personal recommendation.