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One of the biggest sources of confusion for people trying to make sense of financial jargon is the difference between "saving" and "investing". Financial professionals use these words interchangeably, but it's best to keep the concepts separate. Saving is putting money into bank and building society accounts. The cash is safe, and grows by a small amount through interest.
An investment has the potential to grow by far more, because the capital is put into stock market investment funds. As the FTSE index rises and falls, so too does the value of your shares. The downside is that a business collapse or a stockmarket plunge could leave your investment worth less than you bought it for.
Losing your original cash stake can't happen with savings accounts. That's what makes savings appealing. But (and it's a big "but")
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you should check the interest rate is more than inflation, otherwise you will end up actually losing money.
Also take tax into account. Basic-rate tax is taken off by the bank or building society. Higher rate taxpayers have to pay an extra 20 per cent tax using a tax return. A cash ISA (Individual Savings Account) is tax-free, so the interest rate on the advertisement will be the rate you get. Everyone has a £3,000 allowance each year.
Once you have built up some savings, you might want to go for growth using investment funds. The Motley Fool (www.fool.co.uk) has good tips on investing with small sums.
Last, never put cash you may need in a hurry into a stockmarket account; it's a recipe for disaster. Cash may be dull, but it has the great advantage of being there when you need it. 
FIRST POSTED MAY 4, 2006
 Last week: your company pension |
