The first decision
Should I save or invest?
Most people need both. The real question is which money goes where, and in what order. Here is the order most guidance follows, and the one question that decides the rest.
The short answer
Save first, for the things you need soon and for emergencies. Consider investing only with money you will not need for several years, and only once expensive debt is cleared. Saving protects the number on your statement. Investing gives up that certainty in exchange for the chance of growing faster than prices.
Two things come before investing
Clear expensive debt. A credit card charging 24% costs you more, with certainty, than most investments are likely to make. Paying it off is the one guaranteed return available. See how to pay off a credit card.
Keep a buffer in cash. Three to six months of your outgoings, held somewhere you can reach the same week. It is what stops you having to sell an investment at a bad moment because something breaks. See how to build an emergency fund.
Then one question decides the rest: when will you need it?
Within about two years, cash is generally the right home. A house deposit for next spring does not belong anywhere that can fall in value before spring arrives. Look for a good rate rather than accepting what your current account pays.
Beyond that, cash carries a quiet risk of its own. The balance never goes down, but what it buys does, year after year. That is the point at which investing is worth considering, and the longer you can leave the money, the more time it has to recover from a fall. Our page on money sitting in cash shows what inflation does to a lump sum over ten years.
What saving is good for
Certainty and access. You know exactly what you will have and you can reach it quickly. Money in a UK bank or building society account is also protected by the Financial Services Compensation Scheme up to its limit if the bank fails. Investments are not protected in the same way against falls in value.
What investing asks of you
Patience. Investments can fall, sometimes sharply, and stay down for a while. The honest test is not whether you understand that, but whether you would leave the money alone if it dropped by a fifth and stayed there for two years. If the answer is no, that tells you something useful about the level of risk to look at.
It is not only cash or shares
Between a savings account and the stock market sit bonds: loans to governments and companies that pay interest for a fixed period. Historically they have moved less sharply than shares, though they can fall in value and a borrower can fail to pay. For many people holding cash, they are the part of investing nobody has explained. Our sister site What is a Bond goes through them in seven short sections.
Where to go next
If you decide to invest, most people use a stocks and shares ISA, opened through an investment platform. For free, impartial guidance backed by the government, see MoneyHelper. If the sum is large or your tax position is complicated, an hour with a regulated financial adviser is worth it.
Information, not advice. This page is general information, not advice, and does not know your circumstances. The value of investments and any income from them can fall as well as rise, and you may get back less than you invest.