‘A very tricky conundrum’: Experts give their verdict on saving vs. investing as inflation falls

For years, interest rates were low, inflation was steady and both financial markets and economic conditions were relatively stable.

Then the Covid-19 pandemic turned everything on its head.

Inflation began to soar and central banks around the world hiked interest rates in an effort to halt rising prices.

Now, inflation is falling – but interest rates remain high, and it’s unclear when they might start to come back down.

This makes things tricky for investors. Is short-term saving or long-term investing more lucrative right now? Which should be prioritized, and is there a way to use the current economic climate to create more wealth?

Higher interest rates should mean greater returns on savings, but there are several things to consider, according to the experts.

“We’re now in a position where you can earn decent returns on cash, and actually, now inflation is falling you can earn higher-than-inflation on cash,” Laura Suter, head of personal finance at AJ Bell, told CNBC’s “Squawk Box Europe” recently.

But she said one thing that is often overlooked is that people will likely have to move bank accounts to get the highest rates of interest, although this process is now relatively easy.

Suter also acknowledged that the market has created a “very tricky conundrum for some investors when they’re thinking about investing for the long terms vs. how much they should have saved in cash.”

For Emma Wall, head of investment analysis and research at Hargreaves Lansdown, investing may be more lucrative in the long term.

“Investing always outperforms cash over the longer timeframes,” she told CNBC. “Over a 30-year time horizon, history suggests that investing can be twice as powerful than leaving your money in cash.”

On the flipside, savings can be useful for short-term financial goals, Claire Exley, head of wealth services at Nutmeg, told CNBC. Setting up a regular direct debit into a savings account can be one way to accumulate savings almost without realizing, she suggested.  

For those who do decide to invest, a whole additional series of questions arise, especially around risk.

These concerns have grown since the pandemic when social-media-fueled meme-stock and cryptocurrency investing led many young investors to lose most — if not all — of their funds.

But higher risk is, in fact, more suited to younger investors, Wall said. “You can take on more risk when you have a longer-term outlook and can top up your investments regularly,” she explained.

Overall, the trend has moved away from high-risk investing, according to Exley.

“We’ve seen that investors of all ages have taken slightly less risk since the pandemic,” she said. Young investors now often show what she calls “good investor behaviors,” such as thinking long-term and accepting short-term volatility.

Ultimately, Suter says, it’s important to remember what’s at the core of investing: diversification, spreading assets, and making sure you are comfortable with the level of risk you have taken.

To balance all of these, the experts said it is important to figure out your priorities.  

For young people in particular, it can often feel overwhelming to try to follow all traditional money advice. Paying off debt, saving for a property, paying into a pension, and having a chunk of money to fall back on in emergencies can be costly — and often impossible.

“It’s quite hard to see how their budget can stretch in all of those directions without people either having very high-earning careers or ending up having to live a very frugal lifestyle,” Suter said.

Figuring out what to prioritize and making decisions about how to save and invest based on that is key, Exley pointed out. “Knowing what your goals are is an excellent first step,” she said. Saving may be best for short-term goals, then investing is an option for the long term.

“When it comes to your pension, make the most of your company pension scheme, particularly if they offer generous contribution matching,” she recommends.

She also advised researching government schemes, like the U.K.’s Lifetime ISA which sees the government top up investments that go towards owning a property for saving for later life.

And not all money decisions need to be about traditional goals either. “More fun things like going on a really nice holiday in a couple of years’ time or celebrating a big birthday with friends” also count, Suter said.

“Investing doesn’t always have to be about those things that are super far in the future like retirement, they can actually be for slightly more shorter term wins and that can help motivate you towards saving and investing.”