Both saving and property investment are valid methods of growing wealth, but each has its benefits and risks.
It can be difficult to decide whether to invest in property or keep your money in a savings account. To help you understand, we cover the key differences and the pros and cons. We also look at the implications of inflation and rising interest rates on both.
From planning for your retirement, income generation, philanthropy, or even saving for your kids’ futures or school fees, it’s good for you to consider ways to make your money work harder. Having a clear goal will help you decide which investment path is right for you. A short-term goal of having enough money for a wedding or another celebration probably needs a different strategy than planning for retirement. Saving vs property investment is best answered by looking at your goals.
And also pointing out the obvious. You shouldn’t consider investing if you don’t have the money. A good rule of thumb is to have enough savings to offset any risk from your investment scenarios.
The golden rule:
Save for what’s around the corner and invest for the future.
What are the key differences?
The first key difference between saving and property investment is the level of engagement and control. Savings, such as putting money into a bank account or investing in a fixed term savings account, typically require little to no active management once your funds find their home. However, you may have very little control over the results.
Property investment, depending on the route you pick, is likely to require more time and effort but also puts you in the driving seat. Additionally, property investment offers the ability for potential rental income, which could provide a steady stream of passive income.
The second difference is the potential return. Savings accounts generally offer low interest rates, which means a low return. Property investment has the potential for much higher returns, especially if the property is purchased at a lower price and appreciates over time, although its value can also go down.
That brings us to the third big difference: risk. Savings accounts or deposit accounts are considered to be relatively low risk, as the principal amount is guaranteed and the returns are generally stable and predictable. It’s also easier to access your money if you need it in an emergency. Property investment can be considered higher risk, as the value will fluctuate based on market conditions and it may not be sold at the desired price when you need to convert its value into cash. That’s why it’s classed as an illiquid investment.
The pros and cons of savings vs property investment
Both approaches have their own pros and cons, so let’s look at savings first:
Savings ‘pros’:
- Low risk: Putting money into a savings account or investing in a fixed term savings account is a relatively low-risk way to grow wealth.
- Safe option: Under the Financial Services Compensation Scheme, if a UK bank or building society that you save with goes bust, you’d get back up to £85,000 of your savings.
- Convenient: Savings accounts are easy to set up and require little to no active management.
- Liquid: Savings can be easily accessed in case of an emergency or unexpected expense.
Savings ‘cons’:
- Low return: Interest rates on savings accounts and fixed-term savings accounts are typically low, which means the return on investment is also low.
- Affected by inflation: The value of money in a savings account may decrease over time due to inflation. In other words, it will buy you less.
Now let’s look at property investment:
Property investment ‘pros’:
- Potential for high returns: Property values could appreciate over time, which can lead to significant returns on investment.
- Rental income: Owning rental property could provide a steady stream of passive income.
- Tax benefits: Rental income and certain expenses may be eligible for tax deductions. These can be limited so you would need to talk to an advisor to confirm your circumstances.
Property investment ‘cons’:
- Higher risk: The value of a property can decrease, which can result in a loss of investment.
- Time and effort: Researching properties, making offers, and managing tenants takes significant time and effort.
- Illiquidity: Property can be difficult to sell quickly and it may take time to find a buyer.
Thinking about inflation
Inflation is the rate at which prices for goods and services rise. It can have a negative impact on savings, as it reduces the purchasing power of money over time. If you have £100 in savings and the inflation rate is 3%, then after one year, your £100 will only be able to purchase the same amount of goods and services as £97 would have before. So if the interest earned on your savings is less than inflation, your money may not keep up.
Inflation can also have an impact on property investments, both positive and negative. Here are a few ways that inflation may affect property investments:
- Appreciation: Property values are likely to appreciate as a result of inflation in the long term. As prices for goods and services increase, the value of property assets also tends to increase. This could result in a higher return on investment for property owners over the long term. The general rule of thumb is if you look at it over a longer period of time, say 50 years, on average, property value doubles every ten years – it might go up and down but long-term property on average, trends upwards.
- Rental income: Rental income can also increase with inflation. As prices for goods and services rise, landlords may raise rents to keep up with increasing costs. This can result in higher rental income for property owners.
- Financing costs: When interest rates rise, the borrowing cost is likely to increase, making it more expensive to purchase and finance a property.
- Maintenance and repair costs: As prices for goods and services increase, so do the materials and labour costs. This could result in higher expenses for property owners.
Keeping an eye on interest rates
When interest rates rise, the returns on savings accounts and other fixed-income investments typically increase, which can help to grow wealth over time.
An increase in interest rates can have a mixed impact on property investment.
On the one hand, with rising interest rates many landlord’s properties stop making as much money because the increase in interest has eaten into their cash flow. Rising interest rates can also make borrowing more expensive. This could also make it more difficult for property investors to secure mortgages for new properties, which may limit their ability to expand their property portfolio.
The other side of this is an increase in interest rates could also have a positive impact on property investment in the UK. As interest rates rise, the returns on cash savings and other fixed-income investments typically increase. This could make property investment more attractive to investors, as it may provide a higher return on investment than other low-risk investment options.
Remembering your goals
In summary, property investment and savings are two distinct ways to grow wealth, each with its benefits and risks. While savings is a low-risk, low-return option, property investment offers the potential for higher returns and rental income, but also comes with a higher level of risk and management. It’s important to consider your personal financial goals and risk tolerance when deciding which option is right for you.
This isn’t advice. We can’t give you any advice – you have to decide if property or savings is the right investment strategy for you.
If you invest, your capital is at risk as investments may go up or down. Investment decisions must be based on definitive documentation and your own independent research.
If you are interested in property investment open your account here