Pensions, investments and savings

One of the biggest mistakes people make, believing that saving money is enough.

By the end of this episode, you'll know why investing could make your money work harder.

Hello and welcome to the Investing Master Plan.

I'm Alistair McQueen.

I've got more than two decades of experience in financial services, and along the way, I've picked up a few valuable insights and seen some common pitfalls too.

In this series, we'll help you see investing in a new light.

We're stripping back complexity, removing jargon and breaking down barriers.

So whether you're just starting out or perhaps already dipped your toe in, you should have the confidence and knowledge to get your money working harder.

In this episode, we'll explore the difference between investing versus saving cash, the magic of compound interests and how it works, what your investment goals are, and short term versus long term investing.

Deciding whether to save or invest can depend upon your situation and what you're hoping to achieve.

Let's take a closer look.

Saving is a way to protect the value of your money from the ups and downs of investing, usually in a bank account or a building society.

People often do it for the short term goals like a holiday or a new car, or for emergencies like an unexpected bill.

When you save money in a bank account, for example, the outcome is pretty certain.

Your money should benefit from interest payments.

Over time, these interest payments will sometimes change up or down, or they can be fixed depending upon the type of account you choose.

The trade off of saving is that the certainty it gives means returns can be smaller than you might get elsewhere.

And there's something else to keep in mind: inflation.

If your savings don't keep up with rising prices, your money won't go as far.

So while saving can feel like the safe option, it's not completely without risk.

It's at this point that you might ask yourself, is your money working as hard as it could be, given your goals and your time frame?

If you're looking for a potentially bigger return, that's when you might want to start thinking about investing.

Investing is about ways to try and grow the value of your money.

It's usually linked to longer term goals, often for five years or more.

A good example clearly is putting money aside for your retirement, even if that feels a long way off.

When investing, you'll typically walk past the savings account and seek a different home.

But unlike savings accounts with their certain interest rates, the value of your money when invested can rise and fall in line with the performance of your underlying investments.

Given the longer term nature of investing, the near‑term ups and downs are hopefully less concerning.

The idea is that by sticking with it, the value of your money should rise by more when invested than when it's simply saved.

Three key factors that will determine the value of investments in the future are how much you choose to invest, how long you leave it invested, and the return on your investments.

You're in control of the first two, and while the return isn't something you can fully control, that doesn't mean you're powerless.

Please bear in mind that considered investing is far from just a gamble.

Put simply, saving is about protecting your money, while investing is about trying to make it grow.

Both are really good habits; it just depends on what you're aiming to achieve.

In the world of investing, compound interest is something that really excites people and for good reason.

Some claim Einstein referred to it as the eighth wonder of the world, others have called it an investor's best friend, and many simply talk about the magic of compound interest.

And what is all this fuss about?

Well, put simply, compound interest is the ability to earn interest on interest over the life of your investment over longer periods of time.

It has the potential to accelerate the growth of your savings so long as you get a similar interest rate.

Over the years, you'll earn more and more interest, and all you need to do is arguably sit, watch, and wait.

Let's take a theoretical example just to show you the potential power of compound interest.

I've consciously kept the numbers simple to help explain the concept.

Your situation and your numbers will likely be different.

This example also assumes no withdrawals are being taken and the money is left to grow.

Let's imagine I invested £1000 and it grew at a steady 10% each year.

Now I know that 10% is quite generous, but it keeps the math nice and simple.

For this example, after one year my £1000 with its 10% growth is now worth £1100.

After two years, this £1100 with a further 10% of growth is now worth £1210.

I'm slowly making progress, but as the interest on the interest on the interest builds, it's remarkable how the value of my original £1000 grows.

After five years with constant 10% interest, my £1000 is now worth about £1600.

After 10 years, about £2600.

After 20 years, about £6700.

In this simple example, my £1000 has grown nearly sevenfold after 20 years.

The snowball effect of compound interest starts to become clear.

And that's all without me having to add a single penny beyond my original £1000.

It proves that the sooner you start investing, the more you can gain.

Even a small start beats waiting to go big with compound interest.

All I've had to do is sit, watch, and wait.

But don't underplay the importance of sitting, watching and waiting.

The power of compound interest does require you to sit — and by that I mean don't be tempted to stand up and spend that interest.

It also requires you to watch.

In my example, I suggested a constant 10% rate of interest.

Now, the world of investing is rarely as constant and as simple as that.

If you watch your investments underperforming, you may want to stand up and take some action.

And it also requires you to wait.

In my example, I showed you how the power of compound interest really kicked in after 10 and 20 years.

The magic of compound interest is real, but it takes time to come to the boil, so be patient once you start and you'll see the magic in action.

Aviva has a simple compound interest calculator and you can try it for yourself.

Just enter the amount and see how it could grow after 5 or 10 years.

There's a link in the video description.

Right, let's talk about goals, because just like having a fitness goal that keeps you motivated at the gym, an investment goal can really keep you on track with your money.

When you have a clear goal, you know what you're working towards and how much to put away; like a sat nav, it helps you stay on course even if the journey feels long.

Now your goals will depend on when you'll need the money, whether it's medium term like saving for a house, or maybe even long term like retirement.

Just remember, the value of investments could go down as well as up and you could get back less than you put in.

So having that goal in mind helps you make smarter choices along the way.

OK, so how do you actually set a goal?

Here are a few questions you could ask yourself.

What are you investing for?
Could it be a house, your five‑year plan, or maybe even retirement?

When will you need the money — short, medium or long term?

How much do you think you'll need?

How much can you realistically put aside each month?

How comfortable are you with investment risk?
(And don't worry, we'll talk more about that later in the series.)

My top tip?
Set a realistic goal and then work backwards from there.
It will help you make a plan.

Let's talk about time, because when it comes to investing, your time frame really shapes the way you should think about your money.

And to make it a little bit more fun, we've got this little map to guide us along the way.

Think of this as your money's journey, from a short little trip to a long epic adventure.

And just like any trip, the way you travel changes depending on how far you're going.

We'll start with short term goals like a new car or a holiday when you need your money in just a couple of years.

Safety is the priority.

That's why high‑interest saving accounts or cash ISAs are usually your best bets.

You can prioritise certainty over the potential of higher returns.

Next stop, medium term goals like a wedding or a house deposit — and that's this little house here.

Here it gets a little trickier.

You want growth, but not too much risk because if markets dip, you might not have the time to recover before you need that money.

You could look at investment funds with a lower proportion of higher‑risk investments like shares and a greater proportion of lower‑risk ones like bonds.

These are often called low‑equity funds.

Long‑term investing — that's this little deckchair here.

This represents retirement.

Markets will have ups and downs along the way, but time is on your side.

Over decades you can afford to take more risk for potentially higher returns.

That's why investing for retirement or long‑term goals is usually where the magic of compound interest really shines.

So that's a wrap for our first episode of the Investing Master Plan.

Let's quickly recap what we've learned today.

We've looked at the difference between saving and investing.

We've seen the magic of compound interest in action, talked about setting clear goals, and understood how your time frame changes the way you should invest.

If there's one thing I want you to take away from this episode, it's this:

If you can start now, even if it's just a little, time is your secret weapon when it comes to growing your money.

Next time, in Episode 2, we'll explore some of the main types of investment products and how much you might want to invest in each.

We'll also look at how to build and maintain an investment portfolio.

And finally, we'll dive into the different things you can invest in.

I'll see you there.