Savings vs Investing: What's Right For You?

Published on
December 14, 2023

If you’ve ever tried to save your money to buy something or achieve a certain goal, you’ll know that the process is much easier when you’re actually making your money work for you and earning a return from it.

In this article, we cover the broad themes of the most common ways you can do this, savings accounts or investing, discuss when each of them may be better for you and talk about the wider considerations you need to be thinking about when making a decision with your hard-earned money. 

At a glance:

  • Savings are ideal for covering short-term expenses and preparing for emergencies
  • Savings accounts can be a safe way to grow your money but they are impermissible 
  • Savings accounts may not be an ideal long-term solution to growing wealth or even preserving it because of the effects of inflation
  • Investing may be a real long-term solution to creating wealth but it's important to understand what is permissible and what isn’t and how much of each asset class you should hold
  • Wahed provides access to diversified portfolios across multiple asset classes meaning growing your wealth and beating inflation in line with your faith has never been easier. 

Okay, so is there really a difference between saving and investing? 

There are several differences between savings accounts and investing.

A. Saving

Saving is essentially the act of putting money away in a safe and secure place. Although for some it might mean putting it under the mattress, most of us think of this safe place as being a bank account.

Now of course - this alone does not mean we earn a return from it, but the type of account we put money in, (i.e. a savings account) dictates what level of return we will make. The return you make is in the form of interest that a bank pays to you for depositing your money with them.

This isn’t out of generosity, banks pay you that interest because in exchange, they then loan your money out to other people at a higher interest rate. At a (very) basic level, this is how banks make money.

There are many different types of savings accounts depending on where you live and they give you different rates and perks based on how long you plan to leave your money saved up for and what your goals for saving actually are, e.g. for a house, for your children etc.

B. Investing

Investing on the other hand is a completely different universe. It's the act of deploying your money into a commercial transaction with the intention of making a profit. 

Think putting your money into starting a business, into someone else’s business, buying a house with the intention of selling it for more or buying gold with the expectation that the price increases over time, these are all acts of investing. 

What is better for me? 

Although the fixed and safe nature of interest is a reason why many people decide to put their money into banks, fundamentally this is not something that is permissible in Islam.

Where is Interest/Riba prohibited in the Quran? 

Islam tells us clearly that interest, or Riba is clearly prohibited in many different passages in the Quran, such as:

"O believers, do not eat up the amounts acquired through Riba, doubled and multiplied. Fear Allah, so that you may be successful and fear the fire that has been prepared for the disbelievers" (Surah Al Imran 130-131) 
"O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers". (Surah Al Baqarah 278) 

Interest is considered exploitative in Islam and creates inequality, injustice and promotes unfairness. Although the prohibition of interest is not the main topic of this article, and we will talk a little about savings rates, we cannot ignore the severity of the sin and also the damage it creates on society. We talk much more about this topic in these articles, which you can see here and here

Should I just invest all my money in that case? 

Now although savings accounts may be largely impermissible, the act of saving your money is perfectly fine and may make more sense in covering immediate expenses. Here are the the things that you should consider before investing:

1. Clearing interest-based debt  

This should probably be your number one priority. If you have any personal loans, credit card debt etc. it is always a good idea to clear these as they will usually have a high level of interest attached to them. 

2. Setting up an emergency fund

It's really important to have an emergency fund to cover life’s unexpected expenses. It’s pretty much the way of the world that when you think you’re able to save properly, the car insurance is due, or the fridge stops working. 

More importantly, you need to think about if you’re unable to work for a certain amount of time, do you have enough to keep you afloat? A good way to think about an emergency fund is first calculating your monthly living expenses and then multiplying it by 3-6 to give you a good buffer.  

The thought of investing my money is scary, I’ll just keep my money in an account which doesn’t pay interest, forever.

If this is you, then don’t worry - the idea of investing your money is scary to most people. 

One thing you do need to keep in mind though is inflation.

Inflation is officially defined as the general increase in the price of goods and services and reduction in purchasing power.

What does that actually mean though? 

Have you ever thought about why the groceries that used to cost £50 a year ago, now cost a little more, say £55. This isn’t because you are buying different things, it is this idea of inflation in action. And it's not just groceries, fuel and energy are all more expensive than they were 10 years ago and this is why it’s so important to understand. 

Without getting into the deep economic technicalities of what causes inflation or how governments are trying to reduce it, what you need to know is that the rate of inflation is based on the movement in price of a ‘basket’ of goods and services in the economy. This creates a rate and is the number we all see in the news. Though there are a few different buckets that are measured, the one you will most likely see is the CPI, the consumer price index. 

So when you’re thinking about just saving your money and not investing it, because you think it will be safe, this is also what could be making you poorer.

Lets go through this. 

This graph illustrates the rate of inflation over the last 10 years against the average savings account rate. You can see that in almost every month (besides a period between 2015-2016), inflation was always higher than the average interest rate. 

This means, even if you had been putting your money in an interest-based account (which again we stress is impermissible) your savings would not have been growing as fast as the rate of the things you’re buying becoming more expensive.

It can be difficult to get your head around, but what it means is that you are actually getting poorer, in real terms, when you adjust for inflation. 

Let’s plug in some real numbers to just showcase the effects of inflation even more. The average person in the UK in 2023 has £17,365 in their savings. Let’s suppose they had that amount in 2013. This is the impact of inflation in that 10 year span. 

It shows that for your savings to have the same purchasing power in 2023 as it did in 2013, it would’ve had to grow to £22,834.96. But based on average savings rates from the ONS, it would’ve only grown to £18,967.46, a shortfall of £3,867.50. 

To make the situation even worse, if you do decide to have your money in an account that doesn’t even pay interest, then the losses are even bigger and grow even more the longer it sits in your account. 

This is why inflation is sometimes described as the invisible tax, because completely unknown to most, their wealth decreases every year that their money is sitting idle or not at the minimum, growing in line with inflation. 

I can see the need to invest, how should I start? 

Now there are 2 main things you need to think about:

  1. What are the things I can invest in?
  2. What are my specific investment goals?

As a  Muslim, we have many different investments available to us, some of these include: 

1. Stocks and Shares

Investing directly into a company, especially ones that are publicly traded has been a longtime source of wealth creation. 

As Muslims we need to make sure that these companies are not involved in any industries which Islam prohibits, such as alcohol or weapons manufacturing and also importantly, that it complies with certain financial controls, such as not being heavily burdened by interest based debt. 

These specific rules are derived from the Quran and Hadith and are standardized by a board of scholars, who represent all the major schools of thought in Islam. The most famous organization is the Accounting and Auditing organization for Islamic Financial Institutions (AAOIFI). We talk more about these specific standards and the rulings here

Although stocks and shares can go up and down in price, historically there is a strong upwards trend. Investors can diversify their risk by investing into an Exchange Traded Fund (ETF), which is essentially a basket of stocks, across multiple industries. This means if one sector is doing badly, the performance can be mitigated by other sectors performing better.

2. Sukuk

Sukuk are a Shariah compliant alternative to bonds. They are essentially a way for governments and large corporations to finance major projects. There are many ways to structure a Sukuk, but the most common involves the government/corporation selling a major asset to investors, such as a building and then paying a rent to the investors for a period of time. This creates a steady stream of income for investors through the rent and this is why Sukuk are considered to fall in the fixed income asset class. The one potential drawback is that although returns can be steady, they are also often quite low. 

3. Commodities

Commodities such as gold and silver have been commonly used as a store of value and investment for a long time. Especially in the case of gold, since it is relatively rare, finite and has many uses, it is a very popular investment. Since gold is considered to be a Ribawi item, there are several considerations you must factor in to ensure you do not fall into Riba. More information on this can be accessed in our deep dive on Riba here: 

4. Property 

There are many different ways to invest into property and two main ways to make a return from it, through rent or profit from selling, known as capital gain. 

Properties can be purchased via cash purchases, crowdfunded where multiple investors pool their funds together or through Islamic mortgages, which are still a source of contention in the Islamic finance community but also commonly used. 

Choosing what to invest in

All of these asset classes have different risk profiles, some are better suited for more long-term investors, others for those that are more risk averse. It depends on your nature. We are not all the same and have many different investment goals and objectives. 

An important step is to be honest about what your investment goals actually are and attribute some real numbers alongside them. 

You may want to buy a car in the next 3 months, get married in the next 5 years, and buy a house in the next 15 years. These are all really important goals for you to achieve and investing the same way for all of these goals may not be the right thing to do. 

For instance, buying a car so soon means investing all your money into an asset class which could go down in the short term would be a bad move so you may want to invest in something lower risk, even if the returns are also lower.

Similarly, investing all your money in something which can generate steady but low returns over a long period of time could also be a bad move, especially when you factor in inflation as we did above. 

What you may consider is diversifying your investments across these assets with more weighting to stocks and shares for example, which can potentially generate higher long term returns, but couple this with investment in Sukuk, which mitigates the short-term downside risk of your stocks going down. 

That sounds a little complex, how much of my investment should go to what type of asset class? 

That's exactly why we’re here. We help over 300,000 clients invest their money according to their specific needs, every month and totally aligned with their faith and values. 

We do this by asking you a series of curated questions that are designed to understand your risk profile. We then present you with a selection of portfolios for you to choose from. Each portfolio is made up of several types of assets and the weighting of each of these assets has been extremely carefully done by our experienced investment team to ensure it suits your needs as much as possible. 

We take the stress out of investing and allow you to fully automate your investments every month so you can focus on achieving your goals and doing the things that really matter. 

Our focus is to give you performance, without compromise. But don’t just take our word for it! In the same graph above, we’ve added our actual performance for the past 5 years across a range of UK portfolios - the results speak for themselves ! 

Click here to get started on your journey to halal¹ investing. 

1. The term 'Halal' denotes that it is permitted and follows Islamic law

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As with any investment, a Wahed Invest Ltd investment puts your money at risk, as the value of your investment can go down as well as up. The tax treatment of your investment will depend on your individual circumstances and may change in the future. If you are unsure about whether investing is right for you, please seek expert financial advice.

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