When to save and when to invest


Disclosure: This article is not intended to be financial advice and information should be taken as educational only. Read the disclaimer.

“How much should I save, and how much should I invest?”

I get asked this question all the time.

It's like the financial equivalent of “Which came first, the chicken or the egg?”

But here's the way I look at it —it's not just about the amount; it's about what you're aiming for and when you want to get there.

It's worth thinking about these two not as separate paths, but as intertwined routes leading to your various life goals.

The Similarities: Saving vs Investing

Let's start off by acknowledging a fundamental truth—both saving and investing are about putting money aside for your future.

Think of them as the Batman and Superman of your financial universe; different, but both crucial in their own ways.

Savings offer you the liquidity and certainty to pounce on life's short-term opportunities or challenges, while investments are your ticket to long-term wealth and financial freedom.

The point here isn't to pick a favorite, but to understand when to deploy each sidekick for maximum impact.

When to Save

Got dreams of basking on a tropical beach in the next couple of years?

Or maybe you're eyeing that shiny new car?

For goals that are closer on the horizon—let's say within 7 to 10 years—savings are your go-to.

At least that is my rule of thumb.

That means to work out what you save all you need to do is work out what you might want to access in the short term.

Things like

  • Emergency Fund
  • Holidays
  • Deposits
  • New Car

Add up how much you need to accomplish these and there is how much you should be saving.

You can even go a step further and add your ongoing costs like annual bills so there is a place to access money for those when due.

Consider setting up separate savings accounts for each of your savings goals.

It might sound a tad overboard, but this method has been great for us having enough when we need.

With individual accounts, you'll not only see your progress in real-time but also prevent the temptation to dip into funds meant for something else.

When to Invest

Now, what about those monumental life events that seem light-years away?

Retirement, your kids' education, or perhaps building a nest egg so hefty that it can't fit in any nest?

I believe for goals that extend beyond a 10-year timeline; investing isn't just an option; it’s a necessity.

The reason?

Compound interest, which Einstein famously dubbed the “eighth wonder of the world,” is your best ally in this game.

What kind of goals might you want to invest for?

  • Retirement (or early retirement)
  • Education
  • Wealth building like a business or portfolio

The trick is to identify your long-term objectives, assess how much they're going to cost, and then map out an investment strategy that'll get you there.

Now a strategic way to think about this goals-based type investing is how you'll structure it.

Do you setup a different portfolio for each goal – one for the kids' education, one for early retirement?

It could be as simple as opting into one ETF for goal A and a different one for goal. B.

It doesn't need to overcomplicated.

I personally have all our long-term money invested in a “family wealth fund” which is the fancy name I gave our collection of shares and ETFs.

That's one element to think about, but again like with savings its really just working out what amounts you need for your long term goals and invest that figure.

The P.A.R.T. Framework

I should note that this information shouldnt be deemed as personal or general advice but an educational piece on how to start thinking about the save vs invest consideration.

I've also come up with a little framework that you can run through if you want to make some moves.

P.A.R.T. It stands for Plan, Assess, React, and Thrive.

1. Plan

Identify your financial goals and attach timelines to each. Whether it's a dream trip in 3 years or retiring by 50, get those goals down on paper or in a spreadsheet.

2. Assess

Evaluate the urgency and importance of each goal. This step helps you decide whether to funnel your funds into a savings account or an investment portfolio.

3. React

Time to get moving. Allocate your money into either savings or investments based on your goals' timeline. Remember, for short-term objectives (within 7-10 years), saving is your ally. For long-term goals, investing is the way to go. This is all my perspective and not a factual representation of what is correct objectively.

4. Thrive

It's helpful to review and adjust your financial strategy periodically. Life happens, goals change, and your approach should be flexible enough to adapt. Adjust your allocations if needed, and keep pushing forward.

You're now equipped with a solid framework and a balanced perspective.

That's powerful. But no plan executes itself.

It's crucial to move from thinking to doing.

The power of compounding, both in terms of interest and knowledge, works best when given time.

So, don't procrastinate.

The sooner you act, the better off you'll be.

The Synergy of Saving and Investing

The balancing act between saving and investing is not an either-or situation.

It's a strategically layered approach tailored to your unique set of financial goals and life circumstances.

Think of it as a personalized roadmap, one that requires regular reviews and realignments but ultimately leads you to financial resilience and freedom.

Every dollar you allocate is a building block for your future.

Each choice you make is a step in your financial journey.

And in this journey, the right choices are the ones that align with your vision, your needs, and your aspirations.

Save or Invest?

Do both, but do it wisely.

Plan meticulously, assess rigorously, react sensibly, and thrive enormously.

Your future self could be ready to give you a thumbs-up for making the right moves today.

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Tim Ellis, creator of DadInvestor.com.au, helps people confidently invest and manage their money. Inspired by his own experiences, Tim is passionate about creating a financially secure future for his family and sharing his personal finance knowledge with others.

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